rates
PRICES WILL RISE BY MORE THAN BEFORE Inflation expectations—that is, the extent to which households, businesses, and governments think prices will rise in the future—can be a self-fulfilling prophecy. If everyone thinks that everything will be 5% more expensive next year, for example, then employees will ask for, and get, 5% raises; firms will raise their prices by 5%; and everyone will ultimately spend 5% more. Consequently, the Bank of Canada monitors not only year-over-year headline inflation, but other measures of price changes (including trim, common, and median inflation) and, yes, expectations of future inflation.
According to a survey of Canadian businesses, inflation expectations of 3% or more for the next two years have more than doubled in the past 12 months from 35% to 78%. That an overwhelming majority of Canadian firms expect higher inflation over the next two years than they did just two years ago is notable and signals an increased risk of inflation becoming entrenched. This is yet another indication that the Bank of Canada will pursue hawkish monetary policy though increasing interest rates and quantitative tightening in the coming months.
LOFTIER EXPECTATIONS
80%
78%
70%
60%
53%
50%
37%
40%
30%
20%
10%
0%
<1
1-2
2-3
3+
ANNUAL CPI INFLATION RATE EXPECTATION, NEXT TWO YEARS
Q
Q
Q
SOURCE: BANK OF CANADA, BUSINESS OUTLOOK SURVEY DATA: 2-YEAR INFLATION EXPECTATIONS, CANADA
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