January 18, 2024
Higher interest rates are working to ease inflation expectations and slow the rate at which companies increase prices, Bank of Canada surveys showed. Monday’s reports on business and consumer sentiment indicate that executives are feeling pessimistic and are increasingly turning their attention from inflation to uncertainty about the economic outlook.
The central bank’s business outlook indicator rose slightly to minus 3.2 in the fourth quarter, from minus 3.5 previously. Firms see “less favorable business conditions,” including slowing demand and renewed competitive pressures, which are “moderating” the rise in output prices. They also saw declines in sales volumes, and the sales outlook has deteriorated from a year ago. Pricing behavior is “slowly returning to normal,” the bank said.
The weakness in the survey data bolsters the argument that interest rates are now restrictive enough to bring inflation under control — suggesting policymakers will need to start considering rate cuts soon amid firms’ mounting concerns about a deteriorating economy. “The report should make the Bank of Canada feel a little better that inflationary pressures and expectations are normalizing,” Andrew Grantham, an economist at Canadian Imperial Bank of Commerce, said in a report to investors.
For businesses, inflation expectations have been slowly trending down, the Bank of Canada said. Still, about a quarter of firms think it will take longer than four years for inflation to return to the 2% target, due to increases in wages, food prices and housing costs. Elevated wage growth — more than 5% for permanent employees — is a reason some firms expect inflation to remain above 2% for some time. Still, the majority of companies think wage gains will be back to normal by 2025.
Consumers also perceive that inflation pressures have decreased, and their expectations for price growth for some key goods such as food and gas have moderated. Their persistently high outlook for inflation for services such as rent may be slowing progress in returning overall inflation expectations to where they were before the Covid pandemic, the central bank said.
Although workers understand that the labor market is weaker, their expectations for wage growth remain elevated, according to the central bank survey. On the other hand, actions that may stoke inflation — like seeking larger wage increases — are dissipating, the bank said.
