Bank of Canada surveys reveal that businesses and consumers expect to feel the pinch of inflation for an extended period

Canadian businesses and consumers expect to feel the pinch of inflation for an extended period as continued supply chain disruptions and labor shortages drive up costs and strong demand allows businesses to pass these increases on to customers.

A Bank of Canada business survey conducted in November and early December found that two-thirds of respondents expect inflation to remain above 3% over the next two years. A separate consumer survey found that people expect the inflation rate to be close to 5% a year from now, and still above 4% in two years.

“Compared to before the pandemic, inflation has become the single most important economic variable for Canadians, ahead of jobs and taxes,” the Bank of Canada said.

These findings will be concerning for the central bank and will increase pressure on Bank Governor Tiff Macklem to start raising interest rates in the coming months, possibly as early as the next rate decision on the 26th. January.

Inflation expectations have a huge impact on the destination of inflation, as companies set prices and employees demand wages based on what they think the rate of inflation will be over the next few years. Much of monetary policy attempts to keep inflation expectations around the central bank’s 2% target to avoid wage-price spirals.

This is becoming more difficult as inflation has remained above target since April last year, and concerns over the rising cost of living have become a major political issue and daily topic of conversation. The annual inflation rate reached 4.7% in October and November. The December Consumer Price Index figures will be released on Wednesday.

Fifty-seven percent of consumer survey respondents said they were more concerned about inflation than before the pandemic, and 65 percent of respondents thought it was now more difficult to control inflation. inflation.

The survey of around 2,000 consumers was conducted in mid-November, while the survey of around 100 companies was conducted from mid-November to early December. The results reflect business and consumer sentiment before the Omicron wave and the latest round of lockdown measures.

Inflation expectations are rising amid tight labor markets and stalled supply chains. Businesses reported significant capacity pressures, with 78% saying they would have difficulty or serious difficulty meeting an unexpected increase in demand.

Labor shortages are a particular problem, with four in 10 businesses saying the inability to find workers is holding back their sales. This fuels plans to raise wages to compete for scarce labour. About 80 percent of companies said they intended to raise wages at a faster rate over the next year than the year before.

“Reports on wage competition between companies have resumed and are present in most regions and sectors. They are particularly important in high-skilled occupations and in the technology sector,” the Bank of Canada said.

“The cost of living is also increasingly contributing to wage pressures. Some companies have indicated that they now plan to catch up on wage increases after having limited ability to raise wages earlier in the pandemic,” the bank added.

Companies are preparing to pass on rising input costs to their customers. This will be facilitated by strong demand for many goods.

The business survey found that future sales indicators remain high for companies in sectors that have performed well during the pandemic, such as housing, retail and manufacturing, although it noted that sales Futures in these sectors are increasingly held back by supply-side constraints.

Benjamin Reitzes, managing director of Canadian rates at Bank of Montreal, said the survey results increase the likelihood that the Bank of Canada will start raising interest rates at its meeting next week. Financial markets anticipate about five interest rate hikes this year.

“Simply put, higher inflation leads to higher wages, which leads to higher prices, and then we go back to inflation. The Bank of Canada cannot be comfortable seeing this feedback loop being created,” Reitzes wrote in a note to clients.

“While the sentiment was likely dampened by the surge in [COVID-19] case, the economy’s starting point is much stronger than expected. Growing capacity pressures and inflation expectations suggest that a rate hike on next week’s policy announcement is now a very real possibility,” he said.

Despite rising inflation expectations in the short to medium term, longer-term expectations for consumer price growth appear to be relatively well anchored. The five-year median inflation forecast was 3.5% in the consumer survey, which is below the historical average. The bank also said most companies said they expect inflationary pressures to dissipate over time and inflation to return to near target within one to three years.

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