Most Canadian businesses now expect significantly higher than usual inflation. The Bank of Canada (BoC) Business Outlook Survey for Q1 2022 was released today. One of the key insights is business inflation expectations, which show future sentiment. The survey found a record share of businesses see elevated inflation for at least two more years. As expectations become unanchored, it becomes even harder to control inflation.
Most Canadian Businesses See Elevated Inflation For 2 Years
Most Canadian businesses expect inflation will be significantly higher than the target rate. The central bank’s goal is to maintain inflation at 2 points, with a 1 point margin. In Q1 2022, the BoC found 70% of businesses are forecasting annual inflation at 3% or higher for the next two years. The share of businesses is up 3 points from the previous quarter, printing a record.
Share of Canadian Businesses That See Inflation Above 3%
The share of businesses in the Bank of Canada Business Outlook Survey that expect annual inflation at 3% or higher for the next two years.
Source: Bank of Canada; Better Dwelling.
Few businesses expect stable or low inflation. Only 26% of businesses have forecast between 2% and 3% inflation for the next two years. Just 1% forecast between 1% and 2%. The remaining 3% of businesses were unsure.
Canadian Inflation Expectations Are Becoming Unanchored
As previously stated, the BoC’s mandate is to maintain the target rate of inflation. Only 27% of businesses feel it’s attainable, largely leaning towards the upside. In contrast, 70% of businesses see inflation above the BoC target range. This implies expectations have become “unanchored.”
Unanchored expectations are basically a lack of confidence in the central bank’s control. Once expectations become unanchored, it becomes difficult for the BoC to control inflation. Like high home prices — you can say stop moving up, but until there’s a shock big enough to slow it, no one believes it. The BoC might be saying they’ll “forcefully” control inflation, but businesses won’t believe it until they see it.