–Firms Continue to See Inflation Above BOC’s 2% Target in Short Term
–In 5 years, Firms Expect Inflation to be Within BOC’s 1-3% Target Range
–Most Consumers Expect Mild to Moderate Recession within 12 Months
–More Consumers Than Before Pandemic Anticipate Deflation in 5 Years as Supply Bottlenecks Ease
By Max Sato
The bank is expected to raise interest rates by 25 basis points next week. Last month it raised its policy interest rate by 50 basis points to 4.25% from 3.75% in a seventh consecutive hike in the tightening phase that began in March aimed at bringing high inflation back to its 2% target. The bank also signaled that the phase of aggressive tightening is over.
The bank’s business sentiment indicator fell for the fourth quarter in a row. It stood at 0.07 in October-December, down from 1.74 in July-September, 4.88 in April-June and 4.97 in January-March, after rising to a record high of 5.91 in the final quarter of 2021 from 4.35 previously. The entire time series of the indicator is revised after every release.
The latest level around zero is slightly below the average of the past 10 years, suggesting business confidence is somewhat weaker than usual, the bank noted.
The indicator plunged to minus 6.32 in April-June 2020 from minus 0.83 in the previous quarter (the first negative figure in three quarters) in the first wave of the pandemic but picked up to minus 2.63 in July-September 2020 and plus 0.46 in the following three-month period.
The latest survey was conducted by phone, video conference and in-person interviews from Nov. 14 to Dec. 2.
Inflation Outlook Remains High in Short Term
“Firms continue to expect inflation to be above the Bank of Canada’s inflation target in the short term,” the bank said. “Businesses anticipate slower growth in their input and output prices, mainly due to falling commodity prices and weakening demand.”
As in the previous survey, respondents attribute inflationary pressures to elevated energy prices, persistent supply chain issues, high labour costs and a strong economy.
Inflation Seen Slowing to Target in 5 Years
Looking ahead, businesses continue to expect inflation five years from now to be in the bank’s inflation-control target range of 1% to 3% while the bank’s quarterly Canadian Survey of Consumer Expectations, which was also released Monday, showed that consumers’ expectations for inflation five years ahead are near survey-low levels.
“Together, these results suggest that both businesses and consumers believe that short-term inflationary pressures will eventually fade,” the bank said.
In response to high inflation and rising interest rates, consumers have reduced their purchases of a broad range of goods and services, the survey showed.
“Access to credit has worsened, and real wages have continued to decline. As a result, a growing share of Canadians plan to further cut or postpone purchases in the coming months,” the bank said.
Consumers Foresee Mild Recession
“Most consumers expect a mild to moderate recession in Canada within the next 12 months,” it said. “Of respondents who indicated a recession would affect them, a majority anticipate they would have difficulty paying bills or would face other financial impacts. However, less than one-sixth of respondents who expect to be affected by a recession anticipate losing their job.”
Expectations for inflation one year from now remain elevated at a high level, while actual inflation steadied, the bank said.
Looking five years ahead, respondents’ views about the path of inflation remain varied.
Consumers Expect Deflation in 5 Years
“More consumers than before the pandemic anticipate deflation in five years,” the bank said. “Expectations for deflation appear to be tied mainly to the resolution of supply chain bottlenecks, which some respondents believe could partially reverse the unusually strong price increases Canadians have recently experienced.”
Confusion about the meaning of deflation is not the reason this share is so high, the bank noted. In follow-up interviews, consumers clearly distinguished between disinflation and deflation and did not identify a period of slower inflation as deflation, it said.
“Many of those who expect deflation in the long run believe that consumer prices will decrease as the economy recovers from supply-side shocks,” the bank said. “Many think the barriers to returning inflation to target will ease in a year or two.”