MNI: BOC Surveys See Inflation Seen Grinding Down Slowly

Bank of Canada surveys show companies and households see inflation slowly fading over the next few years and remaining well above the central bank's target, one of the last reports officials will incorporate into a July 12 decision on whether to hike interest rates for a second meeting following a surprise increase earlier this month.

Consumers estimated current inflation at 7% in polling done in May, before the latest figures showed price gains slowing to 3.4%, and predicted CPI of 5.1% a year from now and 3.9% in two years. Some 64% of executives surveyed see inflation exceeding 3% over the next two years, down from 79% in the previous quarterly survey and the record 84% at the end of last year. Another 30% of firms said inflation will range from 2% to 3%, the top half of the Bank of Canada's inflation target range. 

Both surveys showed less concern Canada may be heading into a recession, and once again the most optimistic views were around the housing market where Canadians see prices rising 4.3% over the next year versus 2.3% in the last survey. The Bank of Canada unexpectedly raised its key lending rate a quarter point to 4.75% on June 7 and cited concern that despite its eight consecutive rate hikes through January an overheated economy was still being led by debt-fueled consumer spending.

"Expectations for inflation one and two years ahead have fallen again but remain elevated and above the Bank of Canada's inflation-control target range," the Survey of Consumer Expectations said. "Canadians expect a slow return to typical, pre-pandemic rates of inflation." 

Wage gains are also seen moderating from elevated levels in both surveys and "all respondents in follow-up interviews said the labour market is still in very good shape." Firms see wage gains of 4.5% -- a level officials have said isn't consistent with price stability. 

Firms are returning to more normal price-setting behavior, the business survey said.

The consumer price index has slowed to 3.4% in May from a four-decade high of 8.1% last June. The Bank has said CPI will reach 3% by mid-year and return to the 2% at the end of next year. Officials have also said they’re more worried about upside risks with inflation so far above target for so long. Price gains have topped 2% since March of 2021.

The report is often less about what the specific numbers say than the Bank’s commentary ahead of its next decision. Today’s surveys are followed by the jobs report next Friday, and beforehand investors were split on whether another hike is coming.

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.