Business and consumer inflation expectations are converging. Among the latter, however, the hesitation remains palpable, especially since they see themselves condemned to an erosion of their purchasing power within a certain period of time.
The Bank of Canada published its surveys on business outlook and consumer expectations for the third quarter of 2022 on Monday. In both cases, confidence was down. In both cases, too, a 50% probability of a recession occurring over the next two months is given. In both cases, we are counting on a lasting erosion of the purchasing power of workers.
However, this expected recession should be moderate. At least, companies whose activity is not related to the housing sector and household consumption believe that it will not have a strong impact on demand for their products or services. Overall, however, the pace of demand growth is widely expected to return closer to pre-pandemic levels. In doing so, “the first signs indicate that pressures on prices and wages have started to subside”. With investment and hiring plans now more tempered, companies are reporting a decrease in the magnitude of wage increases. Especially since they observe an attenuation of competition for labor – in particular less solicitation – compared to twelve months ago.
Among consumers, we deplore the fact that wage increases do not keep up with inflation and we are resigned to accepting that they will not catch up with it. They are adapting by cutting spending, changing their shopping habits and relying on remote working, which partly offsets the drop in real wages.
“On the other hand, consumer confidence in labor market conditions is above average, both in terms of their personal situation and that of the economy as a whole. The perceived probability of voluntary job change has peaked, while that of job loss remains below average. »
Inflationary expectations high, but…
However, inflationary expectations remain high, at least over the short or medium term. Especially from a one- and two-year perspective, consumers expect supply chain issues to continue and oil prices to remain high. “Expectations over the five-year horizon have meanwhile declined and are almost back to pre-pandemic levels.” The Bank of Canada notes that “for all horizons, these expectations are now below the current perceived rate of inflation, a sign that consumers believe that inflation will slow”.
Among businesses, short-term expectations remain above the central bank’s inflation target, while long-term expectations are much closer. “Most respondents who expect inflation much higher than 2% believe it will return to target within the next three years. »
Changing business behavior
Interestingly, during the post-pandemic recovery, many companies changed their pricing behaviors in response to high cost growth, strong demand and supply constraints. widespread supply. Businesses and competitors facing the same difficulties, consumers could only accept higher prices, for lack of choice. “Under these conditions, companies have made price increases more marked and more frequent than usual. In other words, during the recovery, companies’ inflation expectations have not played a significant role in their pricing decisions.
But most companies have already resumed, or will soon resume, their pre-pandemic behaviors of changing prices infrequently, waiting for concrete signs of rising costs, and closely monitoring competitor prices.