Bank surveys show that businesses and consumers don't think it's possible to put a lid on inflation.
Consumers' short-term expectations of inflation have increased since the central bank started polling them.
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The Bank of Canada's latest surveys of business and consumer expectations show growing doubt about the central bank's ability to put a lid on inflation, increasing the odds of a bigger-than- usual interest rate increase later this month. You need to know what to look for.
The first-quarter survey of businesses conducted by the Bank of Canada wasn't a good guide to what company leaders think about the world in which we live now
The only things that matter right now are the increases in Statistics Canada's consumer price index, which rose to 7.7 per cent in May, as measured by year-over-year increases. The results weren't good. The presence of excess demand in the economy suggests that it is inflationary.
Nearly half of companies said they expect wage increases to remain above pre-pandemic levels for the next 12 months because workers are demanding a higher cost of living The majority of businesses think inflation will stay above two per cent for at least a couple of years, and a quarter of them think inflation will stay high for longer.
The Bank of Canada has regional offices that interview 100 businesses per quarter. The report is one of the most important inputs into interest rate decisions.
Consumers' short-term expectations of inflation have increased since the central bank started polling them. The median result of the survey was for inflation of seven per cent a year from now to 2020, five per cent in two years, and four per cent in five years.
According to the report, Canadians think inflation will stay high for a long time.
About 40 per cent of households think supply chain issues are the biggest source of inflation, followed by the pandemic and higher government spending. 35 per cent of respondents think the Bank of Canada will achieve its inflation target most of the time in the future, compared with 40 per cent at the end of the year.
Monetary policy is based on psychology. Executives and consumers will set the prices they charge for their goods and services if the Bank of Canada makes good on its inflation targets. If expectations remain anchored to the target, central bankers won't have to raise or lower interest rates aggressively.
The Bank of Canada Governor could attempt a bigger bang in order to convince Canadians that he is serious about wrestling inflation back to the two-per-cent target, even if many of them don't like it.
In the United States, the Federal Reserve, which is facing even hotter inflation, increased its benchmark interest rate three quarters of a percentage point, which underscored the worry that central bankers are losing their grip on inflation expectations. The Bank of Canada will update policy on July 13th. A full percentage point is possible.
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