Bank of Canada findings shows inflation expectations dropping

The Bank of Canada’s business and consumer surveys showed higher interest rates are working to ease inflation expectations and slow the rate at which companies raise prices.

Monday’s reports underscored an economy hit by the bank’s aggressive rate hiking campaign, cementing views that its tightening cycle is likely done and setting the stage for policymakers to start considering cuts as early as the first half of this year.

The central bank’s business outlook indicator rose slightly to -3.2 in the fourth quarter, from -3.5 previously. Firms reported that downward pressures on the growth of their input and output prices has “eased somewhat,” leading to a less negative reading, the bank said.

Firms see softer demand and renewed competitive pressures moderating their output price growth, and pricing behavior is “slowly returning to normal,” the business survey showed. They also saw declines in sales volumes, and indicators of future sales deteriorated compared to a year earlier.

For businesses, inflation expectations have been slowly trending down, the bank said. Still, about a quarter of firms think it will take longer than four years for inflation to return to the two per cent target, due to increases in wages, food prices and housing costs.

 

 

While concerns about labour shortages are receding, persistently elevated wage growth is a reason why some firms expect inflation to remain above the bank’s two per cent target for some time.

Still, the majority of firms think wage gains will be back to normal by 2025. Wage growth expectations are gradually declining as fewer businesses adjust wages for past cost-of-living increases as demand for labour eases, the bank said.

For consumers, they perceive inflation to have decreased, and their expectations for price growth for some key goods such as food and gas have moderated.

Their persistently high expectations for inflation for services such as rent may be slowing progress in returning overall inflation expectations to where they were before the pandemic.

Although workers perceive the labour market to be weaker, their expectations for wage growth remain elevated. On the other hand, actions that may support inflation — like seeking wage increases to offset inflation — are dissipating, the bank said.

 

This article was reported by BNN Bloomberg