MNI: Firms and Households See Sticky Inflation In BOC Surveys

Households and executives surveyed by the Bank of Canada see inflation remaining stubborn and well above target even with a mild recession expected in the next year, underlining why officials have said it's premature to think about lowering borrowing costs after pausing rate hikes last month.

Most firms continue to see inflation running much faster than 2% until at least 2025, the Bank reported Monday. A separate survey showed households saw the current inflation rate at 7.1% and at 6% in a year. Those figures compare with recent record highs of 8% and 7.2% in the last quarterly report. 

"Most consumers think the Bank’s ability to get inflation back to target is hampered by high government spending and challenges with supply chains," according to the Survey of Consumer Expectations. Families struggling with inflation and higher interest rates are planning to cut back on discretionary purchases as their wages fail to keep up even in a strong job market, the report said. 

The results are troublesome for Governor Tiff Macklem who hiked rates to the highest since 2007 last month and said he's likely done with inflation expected to slow to 3% by midyear and back to target in 2024. Officials have also said that with inflation already well above target for so long they are more concerned with upside risks even following the collapse of Silicon Valley Bank. Both surveys were taken before global banking strains, but some more recent follow-up business questions suggest sentiment hasn't changed much since then, the Bank's report said.

The Bank took some solace in firms indicating supply chain pressures are easing. "As supply and demand continue to normalize, firms expect the size and pace of output price increases to moderate from those over the past 12 months. This suggests that firms are gradually shifting closer to their normal price-setting practices," the Bank's report said. Business investment plans have also stabilized after four straight declines. 

The figures mean Canada’s 4.5% policy rate remains negative versus the current rate of CPI and some measures of consumer inflation expectations over the next year. Officials have argued their policy is restrictive because of the cumulative force of their 425bps of rate hikes.

Most economists see the Bank holding its key rate at 4.5% for the rest of this year. The central bank sets interest rates to keep consumer price inflation in the middle of a 1%-3% target band and to bring things back to normal within two years.