Business expectations for inflation have eased: Bank of Canada surveys

OTTAWA – Most consumers and businesses think Canada will enter a recession, according to new surveys from the Bank of Canada, but businesses expect upward pressure on prices and wages to ease while consumers are still pessimistic about inflation in the short run.

The third-quarter business outlook and consumer expectations surveys, released Monday, showed consumers have become more pessimistic about inflation over the next one to two years, while business expectations for inflation have eased.

With inflation well above the bank’s two per cent target, the central bank is monitoring how inflation expectations develop amid concerns that elevated expectations could feed into even higher prices and wages.

The annual inflation rate was 7.0 per cent in August, the most recent available number. Statistics Canada is set to release September inflation data on Wednesday.

Sal Guatieri, a senior economist with BMO, said while the widespread perception among businesses that Canada is entering a recession is bad news, their expectations for inflation are headed in the right direction.

“The good news, especially for the Bank of Canada is those same firms are seeing moderation in price and wage pressures,” Guatieri said.

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For Canadians in general, the consumer survey showed inflation expectations for the next one to two years have gone up since the last survey, as consumers anticipate supply chain disruptions will persist and oil prices stay high.

The bank says consumers still believe those external forces will keep inflation high, but views on what domestic factors are affecting inflation are now more polarized.

As well, “some people think high government spending and price gouging by domestic retailers are also playing a role,” the Bank of Canada said.

To cope with high inflation, almost half of consumers report buying less and buying more items on sale.

About one in five consumers said they have not changed their shopping habits because of high inflation.

Meanwhile, consumer expectations for inflation five years from now have eased to near pre-pandemic levels. Still, consumers were more divided this quarter about where inflation will be in the long run.

CIBC chief economist Avery Shenfeld said consumers are more pessimistic about inflation than businesses because they “aren’t as sophisticated in how they look at the economy and translate that into expected inflation.”

“It’s not surprising that with all the focus on inflation in the media, and some fairly high price increases staring them in the face right now, they expect that high inflation will continue,” he said in an interview.

In contrast, the business outlook survey showed business expectations for inflation over the short-term have eased, but remain above the Bank of Canada’s target.

The survey also found businesses expect to raise prices more slowly and wages increases to soften.

Business confidence has also taken a hit as they expect sales to grow at a slower pace over the next year.

In the long run, businesses expect inflation to return closer to the bank’s two per cent target.

The Bank of Canada will make its next interest rate announcement on Oct. 26, when it is expected to deliver another interest rate hike.

Shenfeld said if the Bank of Canada were trying to decide between an interest rate hike of 0.5 percentage points and 0.75 percentage points, the survey results make it more likely the bank will opt for the smaller rate hike.

As the Bank of Canada’s aggressive rate hikes push more economists to forecast a recession, most consumers and businesses are also expecting Canada to enter a recession.

When asked what they think will most likely trigger a recession, consumers said wages not keeping up with inflation, while businesses said rising interest rates.

The consumer survey also found that while most consumers understand the Bank of Canada aims to reduce inflation with interest rate increases, a minority of them expect it will accomplish that goal.

Consumers’ perception of the bank’s inflation target is have also gone up in 2022, especially among consumers who are unaware Canada has an inflation rate target. Those who were unaware thought the target was about five per cent, while those who knew there is a target said it was almost three per cent.

Although it might be frustrating for the Bank of Canada to see consumers don’t understand the link between interest rates and the economy very well, Shenfeld said there might not be much to do about it.

“The bank has a tough road in attempting to give the entire Canadian public an introductory economics lesson,” he said.

Feature image by iStock.com/XtockImages