OTTAWA–According to the fourth-quarter surveys released by the Bank of Canada, inflation expectations among businesses and households in Canada remain elevated. The combination of wage gains and shelter costs is anticipated to keep annual price increases at higher-than-normal levels in the short term.
Business Outlook
The central bank’s business-outlook survey revealed that more than half of companies, 54%, believe that inflation will remain above 3% over the next two years. This level is largely unchanged from the previous quarter. The slow easing of wage growth is one of the factors contributing to this expectation. Firms expect inflation to remain above the Bank of Canada’s 2% target for some time.
The latest labor-market data from Statistics Canada indicated that average hourly wages in December rose 5.4% from the same year-ago period.
Consumer Outlook
According to the separate consumer survey conducted by the central bank, inflation expectations among households have decelerated but remain elevated. The median response suggests that consumers believe inflation will hover near 4% over the next two years. “Persistently high expectations for services such as rent may be slowing progress in returning overall inflation expectations to where they were before the Covid-19 pandemic,” the central bank stated. It is worth noting that rent costs in Canada rose at their fastest pace in the fourth quarter in four decades.
Bank of Canada’s Mandate
The Bank of Canada’s mandate is to set rate policy aiming to achieve and maintain 2% inflation. However, November’s inflation report indicated that prices rose 3.1% in November from a year ago, surpassing market expectations.
Upcoming Interest-Rate Decision
The business-outlook and consumer surveys were conducted in November and December, providing senior Bank of Canada officials with crucial data for future decision-making. The Bank of Canada is scheduled to issue its next interest-rate decision next week, on Jan. 24. In its previous meeting in December, the central bank kept its benchmark interest rate unchanged at 5%. Senior officials, including Gov. Tiff Macklem, stated that it was premature to discuss rate cuts at that time.
Key Details Hidden in Deliberations Ahead of Rate Decision
Senior officials are concerned about potential obstacles to achieving 2% inflation, as expressed in the minutes summarizing their deliberations leading up to December’s rate decision. These concerns mainly revolve around factors such as high shelter costs and increased wage gains.
Subdued Outlook for Sales
The latest business-outlook survey reveals a less-than-optimistic near-term outlook for sales. It notes that indicators of future sales have deteriorated compared to the previous year. Interestingly, nearly 40% of companies reported a decline in overall sales volumes over the past year. However, it’s not all doom and gloom as half of the surveyed firms anticipate an increase in sales volume over the next 12 months, while only 30% expect a decline.
Worries Surrounding Canadian Consumers
Some firms are expressing apprehension regarding the state of the Canadian consumer. This concern arises primarily from a wave of mortgage renewals, amounting to approximately 700 billion Canadian dollars (equivalent to $522 billion), scheduled to take place over the next two years at higher interest rates. Additionally, the consumer survey indicates that around two-thirds of households intend to reduce their spending due to inflation and interest-rate expectations.
Decline in Hiring Intentions
According to the business-outlook survey, approximately half of the surveyed firms do not plan on increasing their payrolls. In fact, an increasing number of companies are considering making minor reductions in staffing. This decrease in hiring intentions aligns with Canada’s recent slowing job growth and a corresponding 0.8 percentage point increase in the unemployment rate, currently standing at 5.8% (still relatively low by historical standards).
Difficulty Accessing Credit and Impact of Higher Interest Rates
The survey highlights that the share of companies facing challenges in accessing credit is significantly higher than it was prior to the Covid-19 pandemic. Roughly three-quarters of the surveyed firms reported being negatively impacted by higher interest rates.
These findings underscore the complexities faced by policymakers as they navigate Canada’s economic landscape. By acknowledging these key details, they can better inform their decision-making processes.
