Reading by central banks that qualifies the inflationary surge beyond official targets as transitory and temporary finds resonance in the expectations of Canadian businesses and consumers.
Still in early October, economists at the International Monetary Fund stuck to the scenario of inflation remaining sustained over the coming months to return to pre-pandemic levels in mid-2022. But “a crucial question is that of the combination of events which could lead to a persistent acceleration of inflation”, they added, mentioning “a possible ‘de-anchoring’ of expectations which would favor the formation of an upward spiral in prices. “.
This potential is not reflected in the recent expectations of Canadian businesses and consumers. And if the context of labor shortage is favorable to upward pressure on remuneration, consumers believe they do not have the bargaining power capable of fueling a wage-price spiral.
In the Bank of Canada’s survey of business outlook for the third quarter of 2021, businesses heavily point to supply chain disruptions and the difficulty of recruiting or even retaining workers, as well as the impact of these bottlenecks on their sales and their cost structure. The pressure is likely to remain sustained, with more than 40% of consumers saying they saved more than usual during the pandemic and planning to spend around a third of that savings by the end of 2022, up from 10% in 2021 However, an abnormally high proportion of businesses would find it difficult to respond to an unexpected increase in demand.
A growing number of companies are therefore considering raising wages. In addition, there is still a strong increase in the prices of inputs and outputs, albeit at a rate that is not expected to accelerate. Companies therefore intend to continue to pass on higher costs of labor and other inputs to consumers.
Their inflation expectations are thus on the rise, and they point to disruptions in supply chains, fiscal and monetary stimulus measures, and recent increases in food and energy prices. However, “the majority of those who anticipate an inflation rate above 2% believe that the factors responsible for higher inflation are temporary,” said the survey.
In its survey of consumer expectations in the third quarter of 2021, the Bank of Canada also notes that inflation will be higher in the short term due to supply problems, but that this will not be lasting. . “Most respondents expect inflation to stay within or just above the Bank’s target for inflation control over the medium term,” which ranges from 1 at 3%… Follow-up interviews suggest that inflation will slow down when the pandemic ends and supply problems will be temporary. In short, “inflation expectations remain firmly anchored”.
In doing so, wage growth expectations remain moderate. Among the reasons given: wage increases previously agreed in collective agreements, low bargaining power, high uncertainty about labor market conditions, greater importance given to work-life balance.
And those expectations vary across demographic groups. They are on the rise to peak among the less educated, a finding that “may reflect the strong employment gains registered in this group over the summer, when restrictions were relaxed.” In contrast, expectations of wage growth fell slightly among people with a higher level of education, the survey said.