Ongoing supply issues expected to drive prices higher: Bank of Canada survey

Click to play video: 'Bank of Canada forecasts inflation will fall to 3% by end of year'
Bank of Canada forecasts inflation will fall to 3% by end of year
The Bank of Canada predicts inflation will remain at about five per cent until mid-2022, after which it will fall “fairly quickly” to about three per cent by the end of the year. Governor Tiff Macklem said while Omicron is a “wild card,” he expects demand on goods will ease as supply chain issues eventually get sorted out and demand shifts back to services after the fifth COVID-19 wave – Jan 26, 2022

The global supply chain snags that marked the latter half of 2021 have stretched into the new year and have been worsened by Russia’s invasion of Ukraine, according to a Bank of Canada survey released Monday.

Businesses now expect these persistent snags hampering the flow of goods around the world to drive costs higher in the near term, with most believing inflation relief is still years off.

The central bank’s Business Outlook Survey for the first quarter of 2022 showed a “record high” number of companies are now reporting “capacity pressures” tied to supply chain and labour-related concerns.

The Bank of Canada’s Business Outlook Survey polls senior management from around 100 firms representative of the country’s overall economy.

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Though the outlook survey was taken in mid-February — before Russia invaded Ukraine — the Bank of Canada followed up with a supplemental survey to gauge the impact of the eastern European conflict on business confidence.

Roughly half of respondents said they expect to be affected by the war, most commonly through higher cost pressures tied to soaring energy and commodity prices.

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Firms do continue to expect strong sales growth, the Bank of Canada said, but at a more moderate pace than the past year.

Businesses that offer in-person, harder-to-distance services are anticipating “significant increases” in sales as COVID-19 restrictions ease.

Businesses surveyed expect average inflation will remain elevated for the next two years, with most firms anticipating inflation will be closer to the central bank’s two per cent target in three years’ time.

Eventual improvement in supply chains and interest rate hikes from the Bank of Canada are cited as the two biggest factors in taming inflation.

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Avery Shenfield, chief economist with CIBC World Markets, said in a note Monday morning that the elevated inflation expectations tied to the bank’s business outlook survey “cement the case” for the a an interest rate hike of half a percentage point at its next rate target decision in a couple weeks.

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“The Bank will take some comfort that respondents see inflation getting back to target by year three, but the near term inflation pressures highlighted in the survey are what make a 50-bp move in April look like a reasonable step at this point,” he wrote.

Nathan Janzen, economist at RBC, said in an interview with the Canadian Press that the new data reinforces the Bank of Canada’s desire and intention to move more aggressively on interest rate hikes.

“It will certainly be more aggressive than what we saw coming out of the ’08-’09 recession or even the oil price collapse in 2015,” he said.

Inflation expectations are similar on the consumer side.

The Canadian Survey of Consumer Expectations — a separate report released the same day by the Bank of Canada — shows inflation on household goods, including gas and food, is expected to remain elevated over the next two years.

The bank’s survey shows consumers expect global supply chain issues will “impede authorities’ ability to control inflation.” The war in Ukraine is also cited as a contributing factor to near-term inflation.

The consumer survey also found that Canadian workers don’t really see their wages increasing enough to match the pace of inflation.

Many Canadians don’t expect high inflation to last forever though, the report added. The consumer survey found that Canadians expect inflation stability in the longer term.

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— with files from the Canadian Press

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