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

·3 min read
Bank of Canada Governor Tiff Macklem arrives to a news conference in Ottawa, Ontario, Canada March 3, 2022. REUTERS/Blair Gable
Bank of Canada Governor Tiff Macklem arrives to 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 anticipate high inflation to persist for longer.

The central bank's quarterly business outlook survey, released on Monday, found that companies' expectations for near-term inflation have increased while at the same time, more firms expect inflation to be higher for longer than they previously did.

"Most businesses anticipate inflation will be more than 3 per cent on average over the next two years," the survey said.

"They continue to point to inflationary pressures from: ongoing supply chain issues, elevated commodity prices (and) strong economic conditions. Several firms also noted that the war in Ukraine is adding additional pressure to supply chains and is keeping commodity prices high."

The report also says that businesses expect faster growth in prices as companies plan to pass on rising costs – including rising wages and supply chain-related price hikes – to customers.

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

The Bank of Canada's quarterly survey of consumer expectations found Canadians expect the one-year inflation rate to be nearly 7 per cent, a new record for the survey. Nearly 42 per cent of Canadians believe the top factor driving high inflation is supply chain issues, followed by the persistence of the pandemic (31 per cent) and high government spending (23 per cent).

While most respondents believe the Bank of Canada will be able to reduce inflation, the survey noted that "some consumers think reducing inflation will be difficult."

Changing spending habits

In the meantime, consumers – particularly those with low incomes – are adjusting their spending habits. The survey noted that consumers have cut spending, postponed major purchases, are looking for discounts more and buying cheaper items in the wake of rising inflation.

"Compared with people in higher-income groups, more lower-income respondents mentioned cutting discretionary spending and focusing on necessities such as food and gas," the survey said.

"People now frequently shop around to find better prices, and they stockpile items that are on sale. Some consumers mentioned sticking to a strict budget for groceries by buying more generic products or not buying items deemed less necessary. Some are relying more on gardening for food or using cheaper forms of commuting, like biking."

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

"The Bank of Canada's surveys of businesses and consumers suggest continued supply shortages, high inflationary pressures and a rise in households' longer-term inflation expectations that will keep the Bank of Canada on track to raise 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 per cent in May, marking the biggest year-over-year increase since January 1983 and putting more pressure on the Bank of Canada to rapidly hike rates.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

Download the Yahoo Finance app, available for Apple and Android.