The Bank of Canada’s quarterly surveys of executives and consumers released Monday show price pressures that have driven inflation to four-decade highs are expected to persist longer than previously thought as the country faces tight labor markets and companies affected by the increase in legal costs. The reports — which also show continued signs that businesses are facing unprecedented challenges to meet demand — underscore the urgency for Governor Tiff Macklem to quickly withdraw stimulus from an overheating economy amid concerns that inflation is taking hold . Markets are almost entirely pricing in a 75 basis point hike in the central bank’s July 13 decision, raising the policy rate to 2.25%. The bank is expected to raise it to 3.5% by the end of this year. The benchmark was just 0.25 percent in March. The Canadian dollar was little changed on the report, trading 0.2 percent higher at $1.2879 per US dollar at 12:13 p.m. in Ottawa. Canadian two-year bond yields pared losses, falling 1 basis point to 3.08%. “The Bank of Canada is concerned that long-term inflation expectations could remain unchanged,” Nathan Janzen, assistant chief economist at Royal Bank of Canada, said in a note to investors. “To avoid this outcome, moving interest rates higher than currently still low levels is an easy call.” On a positive note, the central bank said there is still confidence that the Bank of Canada can meet its 2% inflation target and that price pressures will eventually ease. Consumer expectations for price increases rose across all time horizons, with households seeing inflation at 6.8% in one year and 5% in two years. Both are records. The five-year inflation expectation also rose significantly to 4%, but still remains slightly below pre-pandemic levels. The business survey found that about 78 percent of businesses expect inflation to exceed 3 percent over the next two years, also a record. Expected price gains are a key determinant of actual inflation. Businesses raise prices and workers seek wage increases in part because of how they expect costs to be in the future. In addition to rising inflation expectations, the business survey of executives paints a picture of an economy still being pushed to its limits. While businesses expect sales growth to slow, demand conditions remain strong with companies constrained by labor shortages and supply chain bottlenecks, “suggesting that supply is not keeping pace with demand.” Businesses expect “significant” wage and price increases, according to the report, with supply chain bottlenecks now expected to persist for longer. Investment intentions and hiring remain high, but so does the expected wage bill. Average expected wage growth is now at 5.8 percent next year, according to the business survey, a record. The central bank also raised the risk that consumer spending could be hit by higher inflation, with confidence falling and households not expecting wage gains to keep up with inflation. “Expectations of higher inflation and rising interest rates are weighing on consumer confidence,” the Bank of Canada said. “In response to such factors, Canadians plan to reduce spending. They’re looking for more affordable options when they shop.” Broad business sentiment eased slightly but remains at historically high levels. The central bank’s composite index of business conditions fell to 4.85, from 5.01. However, the Bank of Canada said uncertainty surrounding the economic outlook has increased over the past three months. “Most companies saw this uncertainty as creating risks to their prospects, but it is not yet further affecting their operations or sales expectations,” it said.
