Canadians see consumer price pressures worsening over the next year and are unconvinced that policymakers are committed to bringing inflation to pre-pandemic levels, according to a new survey.
When asked what they think annual inflation will be in 12 months, most respondents said it would be above the current 7% level, according to a Nanos Research Group survey for Bloomberg News . The estimated average was 8%.
About 45% of the survey expressed doubts about the Bank of Canada’s commitment to meet its 2% inflation target.
The results suggest that opinion is tightening around the idea that inflation will remain high. This is a worrying development for the central bank, as it could force policymakers to raise interest rates even more aggressively to keep expectations higher.
Canada’s inflation rate reached 6.8 per cent in April and is set to rise for May. The data is due three weeks before Governor Tiff Macklem announces the next policy decision on July 13, and markets and economists are expecting a third straight half-point rise.
Expected inflation is an important determinant of real inflation, as firms raise prices and workers look for wage increases in part depending on how they predict prices will be in the future. That is why central bank officials have been very concerned about the self-fulfilling dynamics of persistently high inflation, which was the subject of a speech by Deputy Governor Paul Beaudry on Thursday.
The central bank has already raised its one-day lending rate to 1.5% from 0.25% in early March. It is expected to increase to 3% by the end of this year and 3.25% next year. The rates that commercial banks charge their main customers are usually just over 2 percentage points above the Bank of Canada benchmark.
The hawk pivot is largely an exercise in confidence in convincing Canadians that policymakers remain focused on cooling price pressures and returning inflation to the central bank’s target.
In his speech, Beaudry said the risks of unanchored expectations have become a major concern.
“High inflation over extended periods can also complicate the bank’s ability to return inflation to our 2 percent target,” Beaudry said. “This is because inflation can become self-fulfilling if it makes households and businesses expect higher inflation in the future.”
The Nanos survey is a hybrid telephone and online survey of 1,001 Canadians, with a margin of error of 3.1 percentage points, conducted between May 26 and 30. He found that nearly a third of respondents see inflation as 10% or higher, while only 2% of Canadians expect it to be 2% or less within a year.
The survey also found that 21 per cent of Canadians do not trust the central bank to remain committed to its goal, while 24 per cent said they do not trust it.
Bloomberg has never surveyed these questions before, so there are no time series for comparison. There is evidence that Canadians often perceive inflation as above the actual measured rate.
Although Bank of Canada surveys have found that inflation expectations have risen in the short term, officials argue that long-term expectations remain anchored.