Little change in the convergence of business and consumer views on a moderate recession, inflation returning to the Bank of Canada’s long-term target range…and the erosion of workers’ purchasing power in the interval. Only this time, the word deflation is appearing on consumers’ radars and companies are reverting to their pre-pandemic pricing behaviors.
The Bank of Canada has released its surveys for the fourth quarter of 2022 on business outlook and consumer expectations. Confidence is further eroded there and the weight of the rise in interest rates is increasingly felt. But overall, the direction remains much the same as the observation proposed in the previous quarter’s report. With one or two exceptions.
One interesting finding stood out from the previous quarterly report. In the post-pandemic recovery, many companies have changed their pricing behaviors in response to high cost growth, strong demand and widespread supply constraints. 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 did not play a significant role in their pricing decisions, we read.
In the Q4 2022 survey, it is highlighted that most companies have already resumed, or will soon resume, their pre-pandemic behaviors — namely changing prices infrequently; wait for concrete signs of rising costs and watch the competition’s prices closely.
On the inflation side, there is still a divergence between consumers and businesses with regard to short and medium term expectations. But both foresee a return to the Bank of Canada’s target range over a five-year horizon, ie around 3.1% on average among consumers, 2.4% among businesses.
However, the differences in trajectory are pronounced from one respondent to another. But, it should be noted, they are more likely than before the pandemic to foresee deflation at the end of the five-year horizon. It seems that these deflation expectations coming from the quarter of the consumers surveyed “are mostly related to the resolution of supply chain problems. Some respondents believe that a release in this regard could partially reverse the abnormally strong price increases seen in Canada recently,” the survey read.
The central bank took care to validate. The rise in the proportion of consumers expecting deflation is widespread regardless of their income bracket, age category and level of education. “This high proportion is not the result of a misunderstanding of what deflation is. During follow-up interviews, respondents clearly distinguished disinflation from deflation, and did not mistake a period of slowing inflation for deflation,” explains the Bank of Canada. High inflation in food is thought by some to be the result of price gouging and the pursuit of profit.
Increased pessimism
For the rest, hyperinflation in food prices remains a major source of frustration for households. Added to this is a further deterioration in access to credit and a continuous fall in the real wage. Sadly, expectations for wage growth are still down in the fourth quarter survey, even though inflation expectations have remained high. “More than half of the respondents think that in the long term their salary will not catch up with the inflation observed recently. This seems to indicate that consumers believe that their wage increases will not be enough to absorb price increases. »
One respondent said in a follow-up interview, “I spend a lot of money buying not much,” it is highlighted.
Small consolation, many say that labor shortages and high vacancies will help stabilize the labor market. “People who might lose their jobs during the forecast downturn would find a new one more easily than in previous downturns,” they said. »
This all has to be put in the perspective of increased pessimism among Canadians about their ability to absorb the rise in interest rates. The fall in insolvency firm MNP’s Consumer Debt Index accelerated to 77 points, a record drop of 15 points from the previous quarter and an all-time low since its inception a year ago. is over five years old, writes the firm.
Data from the most recent quarterly survey conducted in early December by Ipsos indicates that a record 47% of Canadians are worried about their level of debt, up 7 points from the previous quarter. Still 45% say they are $200 or less away from being able to meet their financial obligations at the end of the month. “Of that number, 30% say they already don’t make enough money to cover their bills and obligations. »