Despite Canada’s booming labor market, households see a bleak year ahead. Bank of Canada (BoC) conducted its quarterly Survey of Consumer Expectations for Q4 2022. The results show households expect inflation to continue ripping higher over the next year. At the same time, the outlook for their own wages have eroded. The combination has led households to expect a sharp drop in real (inflation-adjusted) wages over the next year.
Canadian Households Continue To See Higher Inflation
Canadian households continue to see higher inflation in the coming months. They expect prices to rise 7.2% over the next 12-months according to the Q4 2022 survey. This is a slight increase from the 7.1% expected in the previous quarter, and a big jump from the 4.9% a year ago. In short, they don’t see moderation in the coming year—they see inflation continuing at this pace.
Canadian Households See Falling Real Wages Ahead
Results of household expectations for inflation and wage growth over the next 12-months.
Source: Bank of Canada (Survey of Consumer Expectations); Better Dwelling.
Canadian Households No Longer See Lofty Wage Growth Ahead
At the same time, Canadian households have eroding expectations for wage growth. They expect their wages will rise an average of 2.5% over the next 12 months, down from 2.8% in the previous quarter. In fact, households have never in the survey’s history expected wages to rise anywhere near the current rate of headline inflation (6.8%).
Households Expect A Sharp Decline In Real Wages, & That’s Going To Be A Problem
If it didn’t jump out at you, the gap between inflation and wage expectations is huge. Households expect inflation to rise an average of 4.7 points faster than their wages. It’s an unusual gap, with inflation expectations typically outpacing wages only slightly. There’s never before been a gap like this.
A decline in real wages means an erosion in quality of life, and reduced spending power. Households expecting a reduction in quality of life during a strong labor market is problematic. It’s likely to amplify the recession, since they already see their wages failing to keep up with their cost of living.
Reduced spending power can also amplify recession risk and make it harder to recover. If necessities regularly consume a larger share of income, the additional money has to come from investments or consumption. A reduction in either area can reduce employment, which is the opposite of what a downturn needs.