Central banks are expected to step up their offensive in the face of accelerating inflation thrown out of control by Vladimir Putin’s war on Ukraine. But the scope of this monetary tightening is nonetheless mitigated by a surge in prices, which reflects a problematic situation on the supply side.
The war in Ukraine is amplifying the explosion in commodity prices and exacerbating the distortions in supply chains that have emerged in the wake of the pandemic. The oil shock, contraction in the supply of base metals and a feverish outbreak affecting the prices of forest products and agricultural commodities thus add their weight to a rise in consumer prices which was already widespread even before President Putin launched his aggression.
The findings of the Bank of Canada’s survey of business outlook and consumer outlook for the first quarter of 2022 were unequivocal.
For the former, labor capacity constraints and supply chain issues remained glaring, with the number of companies reporting these pressures even peaking. We read that the companies forecast strong growth in input and output prices and expect the invasion of Ukraine to increase cost pressures. Their expectations regarding average inflation for the next two years remain high: they believe that inflation will only return to close to the Bank of Canada’s 2% target in three years.
Perception is worse among consumers, as their short-term inflation expectations have reached an all-time high. Many believe that inflation will be higher over the next two years, especially for essential expenses like food, gas and rent. “They believe that the supply problems will influence inflation for at least two years and affect the authorities’ ability to control it. And the invasion of Ukraine will aggravate already high inflation.
Loss of real income
Added to the difficulties is an erosion of real disposable income. “Although the workers anticipate significant price increases in the short term, they believe that their wages will increase only moderately. »
In the context of the tightening of the labor market, the average hourly wage of employees increased by 3.4% over 12 months in March, an increase compared to 3.1% in February, indicated Statistics Canada on Friday. In Quebec, the increase is 5.5%. However, in February, inflation as measured by the consumer price index increased by 5.7% year over year, and a strong acceleration is foreseen in the March data.
“Year-over-year wage growth among all employees (+3.4%) remains below the average recorded during the second half of 2019 (+4.3%), when labor market conditions just as tense were observed,” added the federal agency.
While the excess savings accumulated during the pandemic helped mitigate the inflationary impact, the gradual disappearance of government assistance and the acceleration in the rise in consumer prices since the second half of 2021 have weighed on the real household disposable income. It should also be noted that the low interest rates during the first phase of the pandemic offset the effect of overheated real estate on mortgage payments. Gold, rising rents in anticipation of a rise in key rates now has the opposite effect.
“Gasoline, transportation, food and real estate prices have risen the most in the past two years. If the trend continues, the burden of these price increases on household budgets could slow consumer spending,” explained Pierre Cléroux, chief economist at the Business Development Bank of Canada. Already, discretionary spending is being impacted for many households.
Front line real estate
Residential investment is at the forefront of the sectors expected to suffer the strongest repercussions.
The Professional Association of Real Estate Brokers of Quebec (APCIQ) published Monday the statistics for the first quarter of the residential real estate market. Activity continued to slow in the first quarter of 2022, with the number of residential sales standing at 25,845, a decrease of 17% compared to the same period in 2021.
“While this slowdown is notable when compared to the exceptional transactional activity of the past two years, [le nombre de ventes] remains higher than the historical average for the first quarters before the shock of the pandemic, which was closer to 20,000 transactions,” however, specifies the APCIQ.
That said, the resale market remains under the influence of a persistent scarcity of active listings, which is fueling overbidding and causing upward pressure on prices. And the APCIQ points out that households will soon have to face the headwinds that will be blown by a significant increase in interest rates, justified by a well-established inflationary context that is increasingly eating away at purchasing power and confidence.