Consumer and business inflation expectations have risen over the past quarter, marked by rising food and fuel costs.
Posted yesterday at 11:03 a.m.
Under the circumstances, it is more than likely that the Bank of Canada will raise its key rate by 75 basis points on July 13, say RBC and BMO economists.
The target overnight rate would thus rise from 1.50 to 2.25%, while the official discount rate, currently at 1.75%, would be 2.50%.
Calling all
Would a 75-point increase in the Bank of Canada’s key rate upset your budget? Have you started to feel the effect of the previous hikes?
The Bank of Canada published Monday morning the most recent deliveries of theCanadian Consumer Expectations Survey and of theBusiness Outlook Survey.
“Short-term inflation expectations have reached record highs, with prices one year ahead expected to reach +6.8% year-on-year (vs. +5.1% in Q1), while gains in two years are expected. reach +5.0% YoY (vs. +4.6%),” BMO economist Priscilla Thiagamoorthy wrote in a note to clients.
In terms of the long term, expectations have increased significantly in the second quarter of 2022. Consumers believe that in five years, in 2027, inflation will be close to 4% per year, twice the target rate set by the Bank of Canada in this regard.
“This last figure is particularly worrying, comments his colleague Shelly Kaushik, because it indicates that long-term expectations could move away from the Bank’s target; that said, it remains below the pre-pandemic peak of 4.3% in the second quarter of 2018.”
It is important to closely monitor the evolution of inflationary expectations in the country, as the International Monetary Fund pointed out in a 2018 text: “In many countries, the main driver of inflation is based on the evolution of inflationary expectations at long term. The logic being that if many people believe that goods and services will cost more next year, they will move up their purchases this year to save, which will have the effect of increasing the demand for that good and, by way of consequently, to materialize the apprehended price rise sooner rather than later.
Of course, other factors contribute to inflation, recognizes the IMF, “excess production capacity and external pressure on prices”.
Business pressures
On the business side, short-term inflation expectations have also increased. According to them, inflation will remain high for longer than they envisaged in the last survey, “despite the Bank’s shift to a more aggressive tightening stance in the spring”, notes Ms.me Kaushik.
“Nearly a quarter of businesses expect inflation to stay well above 2% for at least three years,” the report reads. At the first quarter survey, it was 14% of companies.
“We believe today’s survey only increases the likelihood that the central bank will follow the US Fed with a hike of at least 75 basis points in July,” RBC said in a commentary released Monday.
“The continued rise in inflation expectations only strengthens our expectations of a 75 basis point hike at next week’s monetary policy meeting,” added BMO.
The central bank has a target for inflation in the country hovering around 1 to 3% with a median rate of 2%. Most economists from the major Canadian banks are still forecasting a return to inflation at 2% by 2024. Last week, Deloitte economist Mario Iacobacci broke the consensus by forecasting a return to normal in 2025 at the latest. early.
“Returning to target, the companies cited a number of conditions that should be met, including higher interest rates, improved supply chains, lower oil prices and an end to the conflict. in Ukraine,” says BMO.
Salary increases on the horizon
Within businesses, expected wage growth over the next year jumped to 5.8%, from 5.2% in the first quarter and 4.0% a year ago. “Hiring intentions remain high, but competition between companies has driven up wages to attract and retain workers, with most companies citing the rising cost of living as a major source of wage growth. Looking ahead, we expect upward wage pressures to become a bigger theme in the second half,” says Ms.me Kaushik from BMO.