Most consumers, businesses expect recession but views on inflation diverge: BoC

New surveys from the Bank of Canada show most consumers and businesses expect Canada to enter a recession, though their views on inflation in the short run are diverging.

The third-quarter business outlook and consumer expectations surveys, released Monday, showed consumers have become more pessimistic about inflation in the short run, while business expectations for inflation have eased.

With inflation well above the bank’s 2% target, the central bank is monitoring how inflation expectations develop amid concerns that elevated expectations could feed into even higher prices and wages.

The annual inflation rate was 7.0% in August, the most recent available number. Statistics Canada is set to release September inflation data on Wednesday.

Sal Guatieri, a senior economist with BMO, said while the widespread perception among businesses that Canada is entering a recession is bad news, their expectations for inflation are headed in the right direction.

“The good news, especially for the Bank of Canada, is those same firms are seeing moderation in price and wage pressures,” Guatieri said.

For Canadians in general, the consumer survey showed inflation expectations for the next one to two years have gone up since the last survey, as consumers anticipate supply chain disruptions will persist and oil prices will stay high.

The bank says consumers still believe those external forces will keep inflation high, but views on what domestic factors are affecting inflation are now more polarized.

“Some people think high government spending and price gouging by domestic retailers are also playing a role,” the Bank of Canada said.

To cope with high inflation, almost half of consumers report buying less and buying more items on sale.

About one in five consumers said they have not changed their shopping habits because of high inflation.

Meanwhile, consumer expectations for inflation five years from now have eased to near pre-pandemic levels. Still, consumers were more divided this quarter about where inflation will be in the long run.

The business outlook survey showed business expectations for inflation over the short-term have eased, but remain above the Bank of Canada’s target.

The survey also found businesses expect to raise prices more slowly and wage increases to soften.

In the long run, businesses expect inflation to return closer to the bank’s 2% target.

The surveys also showed most consumers and businesses expect Canada to enter a recession.

When asked what they think will most likely trigger a recession, consumers said wages not keeping up with inflation, while businesses said rising interest rates.

The consumer survey also found that while most consumers understand the Bank of Canada aims to reduce inflation with interest rate increases, a minority of them expect it will accomplish that goal.

Consumers’ perception of the bank’s inflation target has also gone up in 2022, especially among consumers who are unaware Canada has an inflation rate target. Those who were unaware thought the target was about 5%, while those who knew there is a target said it was almost 3%.

The Bank of Canada will make its next interest rate announcement on Oct. 26, when it is expected to deliver another interest rate hike.

CIBC chief economist Avery Shenfeld said if the Bank of Canada were trying to decide between an interest rate hike of 0.5 percentage points and 0.75 percentage points, the survey results make it more likely the bank will opt for the smaller rate hike.