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BoC consumer and business surveys show near-term inflation expectations remain high

Although corporate inflation is slowing, Canadian consumers continue to expect higher price growth in the near term.

Two key Bank of Canada surveys also found sentiment improved in the first quarter among consumers and businesses, despite the continued drag of high interest rates on the economy.

Among the findings, the Bank also reported that many buyers are considering or planning to buy a home in the next 12 months (more details on that below).

Businesses see price behavior as normal

Although demand remains weak, business leaders report a returning sense of optimism, especially when it comes to business conditions, sales conditions and employment targets, according to the Q1 Business Outlook Survey, based on interviews with senior executives from nearly 100 firms.

“…firms affected by the decline in consumer spending in the past 12 months expect their sales growth to pick up in the next 12 months,” reads the report. “Among businesses that expect sales growth to improve next year, nearly half indicated they expect interest rates to drop.”

Inflation expectations among businesses also continued to decline in the quarter, as firms believe that current fiscal policy is working to ease inflationary pressures.

In particular, only 27% of firms now think that inflation will continue above 2% over three years from now. That’s down from 37% in the previous quarter.

As of February, Canada’s inflation rate was 2.8%, now within the Bank of Canada’s target range of 2-3%.

Firms expect wage growth to slow over the next 12 months compared to the previous 12 months. However, expected wage growth of 4.1% next year remains above the historical average of 3.1%.

“Business behavior continues to be normal,” the BoC noted in its report. “But the moderation in wage growth and the gradual pass-through of higher costs are keeping price growth high.”

Consumers expect near-term inflation to remain high

Meanwhile, the Bank of Canada’s Q1 survey of consumer expectations found that while consumers believe inflation has eased, they continue to expect near-term inflation to remain high.

“Consumers often report that their price information at the time of purchase is a major factor in their inflation views,” the report noted, adding that 60% of respondents said food prices were the most important factor in their inflation views.

Consumers also say that higher interest rates are contributing to their expectations that inflation will remain high in the near term.

“Consumers are still feeling the negative effects of inflation and interest rates on their spending, and the cost of living remains a major financial concern,” the report read. “However, the share of consumers who feel worse is much smaller than in the previous quarter—a sign that the negative effects of inflation and interest rates are no longer growing.”

Many people say they are planning to buy a house

As mentioned above, the findings also revealed an increase in the percentage of respondents who said they were considering or planning to buy a house or condo in the next year (about 15% compared to the 2023 average of about 13%).

However, the BoC warned that this increase “is likely to be driven by newcomers, who tend to have stronger purchase intentions than other Canadians.”

In addition to high mortgage costs, consumers report high home prices, limited supply and “great difficulty” for renters to save for a down payment as key barriers to home ownership.

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