Businesses and consumers now expect inflation to be higher for longer: BoC surveys

Bank of Canada Governor Tiff Macklem arrives for a news conference in Ottawa, Ontario, Canada March 3, 2022. REUTERS/Blair Gable

Inflation expectations are on the rise in Canada, according to two new Bank of Canada surveys, as more businesses and consumers expect high inflation to persist for longer.

The central bank’s quarterly business outlook survey, released on Monday, found that business expectations for short-term inflation have risen as at the same time more businesses expect inflation to rise. inflation to be higher for longer than before.

“Most companies expect inflation to average above 3% over the next two years,” the survey said.

“They continue to point to inflationary pressures due to ongoing supply chain issues, high commodity prices (and) strong economic conditions. Several companies also noted that the war in Ukraine is adding additional pressure on supply chains and keeps commodity prices high.”

The report also says companies expect faster price growth as companies plan to pass on rising costs – including rising wages and supply chain-related price increases – to consumers. clients.

At the same time, consumer expectations for inflation are on the rise, with short-term expectations hitting new highs.

The Bank of Canada’s quarterly survey of consumer expectations found that Canadians expect the one-year inflation rate to be close to 7%, a new high for the survey. Nearly 42% of Canadians believe that supply chain issues are the main factors behind inflation, followed by the persistence of the pandemic (31%) and high government spending (23%).

While most respondents believe the Bank of Canada will be able to bring inflation down, the poll noted that “some consumers think it will be difficult to bring inflation down.”

Changing consumer habits

Meanwhile, consumers, especially low-income ones, are adjusting their consumption habits. The survey noted that consumers have been cutting back on spending, postponing major purchases, seeking more discounts and buying cheaper items in the wake of rising inflation.

“Compared to people in high-income groups, more low-income respondents mentioned cutting back on discretionary spending and focusing on necessities such as food and gasoline,” the survey said.

“People now shop frequently for better prices, and they stock items on sale. Some consumers mentioned sticking to a strict grocery budget by buying more generic products or skipping items deemed less necessary. Some rely more on gardening for food or using cheaper means of transportation, such as bicycles. »

The survey results suggest the Bank of Canada will raise its benchmark interest rates by 75 basis points on July 13, economists noted Monday.

“Bank of Canada surveys of businesses and consumers suggest continued supply shortages, elevated inflationary pressures and rising long-term household inflation expectations that will keep the Bank of Canada on track for increase interest rates by 75 basis points at its next meeting,” CIBC Capital Markets economists Andrew Grantham and Karyne Charbonneau wrote in a research note on Monday.

Statistics Canada says inflation jumped 7.7% in May, marking the largest year-over-year increase since January 1983 and putting more pressure on the Bank of Canada to raise rates quickly.

Alicja Siekierska is a Senior Reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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