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PESSIMISM ABOUNDS AMONG CONSUMERS The inflation expectations of businesses and consumers is something the Bank of Canada watches closely—and the latter's are stubbornly high.
Inflation expectations are one of many metrics that the Bank of Canada keeps an eye on, as it matters to actual inflation. If consumers and businesses expect high inflation to persist, they will be more willing to spend more—and that can actually contribute further to inflation. In the most recent surveys of consumers and businesses, we see an interesting divergence in their responses on future inflation. The median consumer thinks high inflation will persist through 2023 at 7.2%, while the average business expects some declines to 4.5%. We should note here that
the Bank of Canada expects inflation to return to 3% by the middle of 2023 while your authors believe we could be back within the 1%-3% target range a little sooner than that. Looking two years out, consumers, on average, continue to see stubbornly high inflation above 5% while businesses expect it to come back to 3% and the Bank of Canada expects to return inflation to its 2% target by the end of 2024. These results show an ongoing challenge the Bank faces in taming inflation and in getting expectations (and behaviour) in line with its target.
UNREALISTIC EXPECTATIONS?
8.0%
7.2%
7.0%
6.0%
5.1%
5.0%
4.5%
4.0%
3.1%
3.0%
3.0%
2.4%
2.0%
1.0%
0.0%
YEAR AHEAD
YEARS AHEAD
YEARS AHEAD
CONSUMERS’ CPI INFLATION EXPECTATIONS
BUSINESSES’ CPI INFLATION EXPECTATIONS
SOURCE: BANK OF CANADA DATA: INFLATION EXPECTATIONS OF BUSINESSES (JAN 2023) AND CONSUMERS (Q4 2022)
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