Inflation expectations over the next two years have reached a record in Canada, a worrying development that will fuel bets on more aggressive interest rate hikes.
Bank of Canada quarterly surveys of executives and consumers released Monday show that price pressures that have brought inflation to four-decade highs will persist for longer than previously thought as the country faces tight labor markets and companies are affected by the increase in contributions. costs.
The reports, which also show ongoing evidence that companies face unprecedented challenges in meeting demand, illustrate the urgency for Governor Tiff Macklem to quickly withdraw the stimulus from an overheating economy amid concerns that inflation is consolidating.
Markets are almost entirely fixing prices on a 75-basis hike in the central bank’s July 13 decision, bringing the policy rate to 2.25 percent. The bank is expected to increase it to 3.5% by the end of this year. The benchmark was as low as 0.25 percent in March.
The Canadian dollar fluctuated slightly in the report, trading 0.2% higher at $ 1.2879 per US dollar at 12:13 pm in Ottawa. Canadian two-year bond yields reduced losses, 1 basis point to 3.08%.
“The Bank of Canada is concerned that long-term inflation expectations may be derailed,” Nathan Janzen, chief economist at the Royal Bank of Canada, said in a report to investors. “To avoid this result, moving higher rates from still low levels is currently an easy call to make.”
On a positive note, the central bank said there is still confidence that the Bank of Canada can meet its 2% inflation target and that price pressures will eventually ease.
Consumer expectations about rising prices rose on all time horizons, and households saw inflation of 6.8% in one year and 5% in two years. Both are records.
Five-year inflation expectations also rose significantly to 4%, but still remain slightly below pre-pandemic levels.
The business survey found that about 78% of companies expect inflation to exceed 3% over the next two years, also a record.
Expected price gains are a key determinant of real inflation. Companies are raising prices and workers are looking for wage increases in part so they anticipate that costs will be seen in the future.
In addition to rising inflation expectations, the business survey of executives paints a picture of an economy still pressed against its limits. While companies expect sales growth to slow, demand conditions remain strong with companies constrained by a shortage of workers and bottlenecks in the supply chain, “suggesting that supply is out of step with demand. “
According to the report, companies anticipate “significant” increases in wages and prices, and supply chain bottlenecks are expected to persist for longer. Investment intentions and hiring remain high, but so do expected wage costs. The average expected salary increase is now 5.8% next year, according to the business survey, a record.
The central bank also increased the risk that consumer spending will be affected by higher inflation, with confidence falling and households not expecting earnings to keep up with inflation.
“Expectations of higher inflation and rising interest rates are affecting consumer confidence,” the Bank of Canada said. “In response to these factors, Canadians plan to cut spending. They are looking for more affordable options when they shop.”
The broad indicator of business sentiment fell slightly, but remains at historically high levels. The composite indicator of central bank trading conditions fell to 4.85, from 5.01.
Still, the Bank of Canada said uncertainty about the economic outlook has increased over the past three months.
“Most companies saw this uncertainty as creating risks for their prospects, but it still didn’t further affect their operations or sales expectations,” he said.