MNI: Bank of Canada Surveys Point To Signs of Stagflation

Bank of Canada surveys Monday showed business leaders and households see the central bank needing at least two or three years to restore price stability even with the economy seen at risk of falling into a recession.

About a third of firms in the Business Outlook Survey said the Bank needs more than three years to restore 2% inflation, and the Consumer Expectations survey showed on balance inflation will be 5% in a year and 4% in two years. When it comes to a recession, the share of firms planning for one was little changed at about a third, while for consumers the share predicting one climbed to 55% from 50%. 

"The growing cost of living remains the most pressing concern for consumers," the report from Ottawa said. "Consumers are also skeptical about whether raising interest rates can lower inflation."

Other measures of pricing behavior showed some improvement from record highs set over the last year but often remain elevated. Half of firms plan to continue with more aggressive price increases while consumer views of wage increases climbed to a record high. The central bank did say that many consumers are feeling the pinch of the Bank's 10 rate hikes and many firms believe the weight of that drag is just beginning.

The consumer price index rebounded to 4% in August from 3.3% in July, and Statistics Canada publishes the September figure tomorrow with economists predicting little change. Inflation has slowed from a four-decade high of 8.1% last June. The Bank has said CPI won’t return to the 2% target until mid-2025 and faces some near-term upside risk from gasoline prices. Officials have also said they’re worried about upside risks with inflation so far above target for so long-- price gains have topped 2% since March of 2021. Governor Tiff Macklem reiterated on a call with reporters Friday he could hike the 5% rate again if needed to curb inflation.

Investors are split on whether the Bank will hike again amid signs of stalling economic growth and unemployment moving up from record lows, versus signs of sticky core inflation. The Bank has called the inflation surge the biggest challenge since inflation targeting was adopted in the early 1990s and come after Macklem tried to get ahead of the inflation wave with a 100bp hike in July.

Canada’s economy shrank at a 0.2% annualized pace in the second quarter after defying investor and central bank views over the past year that a recession was in view.