Two new reports from the Bank of Canada point to rising inflation expectations by Canadian companies and consumers.
The central bank said in a corporate outlook survey released Monday that corporate expectations for short-term inflation are rising and that companies expect inflation to be higher for a longer period than the previous survey.
“Many companies continue to report plans to raise wages to attract and retain workers,” banks said in a report, hoping that wages and prices will grow at a faster pace. Suggested that.
“More and more companies are referring to rising living costs as an important source of wage growth. Almost half of companies have wages rising above pre-pandemic levels over the next 12 months. I expect it to remain. “
CIBC economists say corporate and consumer surveys show continued shortages, high inflationary pressures, and rising expectations of long-term inflation in households that will put the Bank of Canada on track to raise interest rates by three-quarters percentage points. Said suggesting. At the next meeting.
“Companies have suggested that higher prices and interest rates could affect the feasibility of investment plans, but that hasn’t happened yet,” said Andrew Grantham and Kareen Charbonault of CIBC. I am writing in the report.
According to the Business Outlook Survey, companies expect sales growth to slow and return to normal as a result of the rapid recovery from the pandemic.
Labor shortages and supply chain bottlenecks continue to be key issues, according to the report, as supply chain problems take longer than previously expected to resolve.
In contrast, according to the Corporate Outlook Survey, companies are restructuring their supply chains, holding more inventories than usual, and the majority of companies plan to invest and hire more.
However, the Bank of Canada said long-term expectations of inflation by companies have been stable between 2-3 percent.
The report also said that capital investment in the energy sector will increase, but is expected to fall below record highs due to investment in new projects that are less robust than the previous commodity price boom.
“After years of financial stress, most producers are taking advantage of the current plunge in income to improve their balance sheets, reduce debt and pay dividends to shareholders,” the report said.
Meanwhile, a survey of consumer expectations in Canada suggests that consumer inflation expectations are also rising due to concerns about food, gas and rent prices.
Consumer reports also said expectations for higher inflation and rising interest rates are affecting consumer confidence.
Banks pointed out that low-income Canadians and the elderly are more interested in food prices and rents than young respondents and high-income households.
Consumers, especially low-income earners, said they are adapting to high inflation by cutting spending, deferring large purchases, and looking for cheaper alternative discounts and options.
“Some consumers have mentioned sticking to a tight grocery budget by buying more common products or not buying items that seem less needed. Some people rely on it or use cheaper commuting methods such as bicycles, “the report said.
However, the report also believes that most respondents believe that the Bank of Canada has the credibility and tools to bring inflation back to control, and their ability to reach the bank’s inflation target even before the pandemic. I also found that my beliefs haven’t changed much.
Statistics Canada reported last month that annual inflation in May rose to 7.7%. This is the highest level since 1983.
The Bank of Canada is raising its key interest rate target to bring inflation back to its target of 2%.
The central bank has raised interest rates three times so far this year, raising the key policy rate to 1.5%. The next interest rate decision is set for July 13, and many private sector economists expect the Bank of Canada to raise its key interest rate by three-quarters percentage points.
Nathan Janzen, assistant chief economist at RBC, said the Bank of Canada is concerned that long-term inflation expectations will not be hampered and that it may be more difficult to reach inflation targets. ..
“It’s still easy to raise interest rates from low levels to prevent the consequences, and in today’s study, the central bank will follow the Federal Reserve with a rate hike of at least 75 basis points in July. We anticipate even more possibilities, “Janzen wrote in the report.