The risk of inflation becoming entrenched in the Canadian economy is growing, analysts say as rising prices for gas and other highly visible consumer goods undermine the Bank of Canada’s efforts to contain expectations for price increases.
Once inflation is built into an economy, it usually becomes more difficult to control without causing an economic slowdown or even a recession.
Canada’s consumer price indices for May, expected Wednesday, which will include new weights in the basket that are unlikely to have a major impact, are expected to push inflation above April’s three-decade of 6.8 percent.
What central banks fear is a situation where price hikes are self-perpetuating – expectations for higher prices cause people to raise wage demands and accelerate purchases, leading to further price hikes.
The Bank of Canada is “fighting” to contain inflation expectations, said Derek Holt, chief economics officer for capital markets at Scotiabank, forecasting 7.8 percent growth for May’s CPI.
“They missed their chance to nip it in the bud and now you have consumers and businesses that don’t care about what drives it. They’re engaging in extrapolative behavior, and that’s the path central banks always want to avoid.”
As in other countries, much of the reason for the rising prices is due to supply constraints related to the COVID-19 pandemic and the war in Ukraine. But as inflation continues, expectations that price pressures will continue have risen.
A survey by the Conference Board of Canada for May found that 78 percent of Canadians expect inflation to exceed the BoC’s target of two percent in the next three years, up from 77 percent in April.
Investors have noted and are betting that the central bank will match the Federal Reserve’s recent three-quarters percentage point rate hike at its next meeting on July 13, which would be its largest hike in 24 years.
The threat of rampant inflationary expectations comes as Canadian gas prices soared to a record high of $2.15 a liter in June.
“Central bankers can’t be too happy with what’s happening at the gas pumps as it’s one of the prices that households most closely monitor, and along with some other commodities like milk and bread, it has more of an impact on the perception of inflation than the actual weight in the consumer basket,” said Avery Shenfeld, chief economist at CIBC Capital Markets.
To keep expectations anchored as it unwinds stimulus measures in an overheated economy, the BoC has taken the rare step of providing guidance on price path, saying they could move above the top of the neutral range of two to three percent. come.
On July 4, the central bank will publish its quarterly surveys of businesses and households, which will also include their inflation outlook.
“I think the investigations will continue to rise,” Holt said. “It’s a faster and steeper pace of rate hikes to correct those expectations.”