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Consumers and Businesses Expect High Inflation for the Long Term, Says BoC

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On Monday, the Bank of Canada released two reports indicating that inflation is a pervasive and growing concern for consumers and businesses alike. 

According to Statistics Canada, the annual pace of inflation increased to 7.7% in May — its highest level since 1983. And according to the central bank’s reports, many respondents believe that inflation will persist indefinitely, although there is plenty of uncertainty surrounding how inflation will evolve in the years to come.

These reports also revealed that both businesses and consumers are doubting the Bank’s ability to cap inflation, and the ramifications of not doing so could mean an interest rate hike by three-quarters of a percentage point when the Bank makes its next interest rate decision on July 13.

The Bank has raised rates three times this year already in an effort to bring its key policy rate to 1.5% and bring inflation back to its target of 2%.

Although the inflationary pressures faced by businesses and consumers are unique to each entity, it seems that both are feeling the weight of rising inflation when it comes to purchasing, spending, and employment. 

From a consumer standpoint, concerns about inflation have been deepened by rising costs of essential goods, including food, gas, and rent. According to the Bank’s consumer survey, both long- and short-term inflation expectations have increased since last quarter, from 3.2% to 4%, and 5.1% to 6.8%, respectively.

“Canadians think supply chain issues, the COVID‑19 pandemic and elevated government spending are driving high inflation,” the report said, adding that Canadians aren’t anticipating that these issues will be resolved any time soon. The Russia-Ukraine conflict, for instance, could put a damper on supply chains for upwards of two years, which will impact the prices of food and gas.

The impact of these kinds of elevated costs is much harsher for low-income consumers. As such, consumer confidence is dwindling and well below its historical average. This is thanks to high interest rates, difficulty accessing credit, and the increased probability of defaulting on debt.

This is all compounded by the fact that the vast majority of consumers aren’t anticipating wage gains to be on par with inflation. This is truer of employees in the public sector versus those in the private sector.

Wage gains aside, working from home in some capacity could help workers to offset some inflamed costs, such as costs associated with commuting.

While consumers are doubtful that inflation will fall, they aren’t resolute and there is still some sense of confidence that the Bank has the credibility and tools to bring inflation back to target. In part, this is because of the cool down of the housing market, which has restored some faith in the Bank amongst Canadians.

In the meantime, many consumers, particularly low-income earners, are hedging their spending in the face of rising costs. This includes cutting back on general spending and postponing big-ticket expenditures, paying down debts, and putting more emphasis on savings.

Moreover, some savvy consumers made it a point to lock in things like car loans and mortgages before the recent interest rate hikes. But if inflationary pressures persist and interest rates stay high, even those forward-thinking Canadians will find themselves with big bills to pay.

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