Results of the first-quarter survey | Vol. 4.1 | April 3, 2023

This survey took place between January 27 and February 16, 2023. Follow-up interviews took place in March 2023.

Overview

• Expectations for inflation one to two years ahead have fallen but remain well above their levels from before the COVID-19 pandemic. Consumers’ expectations for growth in prices of some goods have edged down, although their price growth expectations for services such as rent have remained high.
• Most consumers think the Bank’s ability to get inflation back to target is hampered by high government spending and challenges with supply chains. Many people believe supply chain issues will be resolved in the next two years, and some think prices for affected products will fall. Those who expect high government spending to impact inflation believe it will continue to do so for a long time.
• High inflation and rising interest rates are putting pressure on consumers—and particularly on mortgage holders. In response, consumers expect to spend less on discretionary services—such as travel, restaurant meals and other social activities—than they did over the last 12 months.
• Most Canadians see a recession as the most likely scenario for the economy in the next 12 months. But many are uncertain about where the economy and labour market are going. Consumers who are more uncertain are planning to spend less and save more as a precaution.
• Despite uncertainty about the economy, workers view the job market as strong. Respondents, particularly those not satisfied with their current job, are confident they can find new work. Workers’ expectations for private sector wage growth are also near a survey high. But wage growth expectations remain below inflation expectations, and most workers do not see their wages catching up with recent inflation over the next year.

Short-term inflation expectations have eased but remain high

Expectations for inflation in the near term have edged down but remain elevated, mirroring actual inflation (Chart 1). The recent similarity between inflation expectations and actual inflation suggests that consumers are paying greater attention to actual inflation. This is particularly true for consumers who give consistent responses when asked in different ways about inflation expectations (Box 1).

Chart 1: Consumers' inflation expectations have slowed

Note: This chart presents median values. For an explanation of the computation, see the Overview. The Overview includes the survey questions. This chart is available by demographic characteristics.

Canadians’ concerns about inflation are still high but appear to be easing. Consumers expect monetary policy to continue to be effective and economic growth to slow. One respondent noted in a follow-up interview, “Inflation is a little bit less concerning now because of the action that [the Bank has] taken with interest rates that should reduce demand and inflation.”

Respondents expect inflation to slow for goods, such as gasoline and vehicles. But while their inflation expectations for goods have fallen, consumers continue to be frustrated by high food prices at grocery stores. One respondent said, “Food prices create a lot of stress,” and, "This bothers me the most." Another said, “Even the prices for specials are too high." In contrast, expectations for services have not changed significantly. Consumers expect the rate of price growth for services, such as rent, to remain high.

Consumers see many obstacles to the Bank reaching its inflation target. Supply chain disruptions remain the most common factor mentioned, although most consumers think these disruptions will be resolved in the next two years (Chart 2). Many also think that high government spending, including spending following the outbreak of the COVID-19 pandemic, may affect the Bank’s ability to get inflation to target for three years or more. Some consumers believe the impact of the war in Ukraine and increased profits for businesses, particularly grocery stores, will also be obstacles.

Chart 2: Consumers think high government spending will affect inflation for longer than supply chain issues will

Canadians’ awareness of the inflation target is growing, and this is helping to ease inflation expectations. Consumers who know of the inflation target tend to have more moderate inflation expectations than do those who are not aware of it (Chart 3). In particular, they are less likely than other respondents to expect either high inflation or deflation in the long term.

Chart 3: Canadians who know Canada has an inflation target expect lower inflation than others do

Expectations for inflation five years from now are at historical lows. Roughly one-third of survey participants expect deflation, often through price reversals, because they think supply chain disruptions will be resolved within the next couple of years. Most consumers, however, still expect inflation in five years to be close to or above the Bank’s inflation target range. In a follow-up interview, one participant said, “Prices are always moving up.”

Box 1: Canadians who provide consistent responses believe inflation will stay high

Using views collected in the Canadian Survey of Consumer Expectations, the Bank of Canada is studying how the high inflation environment of 2021–22 has affected the consistency of participant answers to questions about future inflation. A consumer’s responses are considered consistent when their answers to different types of questions about future inflation match.1 Elevated and persistent expectations among consumers with consistent responses might indicate conditions under which firms may find it easier to raise prices. The analysis finds:

• Several factors may influence why certain groups are more likely to provide consistent responses than others. For instance, some groups have more experience with high inflation.
• During the period of high inflation over 2021–22, the short-term inflation expectations of respondents with consistent answers have closely mirrored actual consumer price index inflation (Chart 1). The stronger link suggests that these respondents may have started to pay more attention to inflation.

Since the second quarter of 2021, the gap between actual and perceived inflation for consumers with consistent views has narrowed considerably. Their inflation forecasts have been above those of professional forecasters and also closer to actual inflation than those of professional forecasters. These consumers expect inflation will stay high for the next 12 months.

Chart 1-A: Some consumers are paying closer attention to inflation than others

Note: For the first quarter of 2023, the data for actual inflation and professional forecasters are for January and February only.
Sources: Consensus Economics, Statistics Canada and Bank of Canada

The impact of monetary policy on spending is broadening to services

High inflation is negatively impacting household finances, and rising interest rates are adding pressure. Compared with how consumers viewed their financial positions during the 2017–18 cycle of policy rate tightening, more than twice as many now say they are financially worse off (Chart 4). Consumers also feel that they are less able to access credit and that the chance they will default on their borrowing has increased. Some Canadians—particularly Indigenous people and holders of variable-rate mortgages—are more likely than others to say they are negatively affected (Box 2).

Chart 4: Consumers feel the effects of interest rates and inflation on their financial situation

Chart 4: Consumers feel the effects of interest rates and inflation on their financial situation

Did you become better or worse off as a result of recent interest rate increases/higher inflation?

Consumers are noticing the impacts of high inflation and rising interest rates on their spending plans. And these impacts are broadening to include spending on services. About one-third of consumers expect to travel less often, eat out less often and enjoy fewer paid entertainment or social activities in the next 12 months than they did in the previous 12 months. This is largely because of the high prices of these services and other essential purchases (Chart 5 and Chart 6). “Due to higher interest rates and higher inflation, we are not eating out as much,” one consumer said. Another reported, “I am now more willing to say yes to travelling, but I have less opportunities due to higher interest rates.”

Chart 5: Consumers are spending less on services because of rising interest rates and inflation

Chart 5: Consumers are spending less on services because of rising interest rates and inflation

Compared to the past 12 months, over the next 12 months, about how often do you expect to...

Chart 6: High prices are preventing consumers from spending on in-person services

Chart 6: High prices are preventing consumers from spending on in-person services

Why do you expect to participate less often in these activities? Check all that apply.

Box 2: Some Canadians have been hurt more than others by rising interest rates and high inflation

High interest rates and inflation are not impacting households evenly. Consumers with variable-rate mortgages and those in equity-deserving groups (such as Indigenous people, people with disabilities and racialized people) are more likely to cite being negatively affected than other consumers, including renters and homeowners without mortgages (Chart 2).

Chart 2-A: Mortgage holders and equity-deserving groups are more likely than other Canadians to be hurt by higher interest rates and inflation

Chart 2-A: Mortgage holders and equity-deserving groups are more likely than other Canadians to be hurt by higher interest rates and inflation

Were you financially impacted by recent increases in interest rates by the Bank of Canada/recent higher inflation? (Share negatively affected, %)

Respondents who have become worse off are showing more distress than other Canadians across several dimensions (Chart 2). These consumers are more likely to report:

• spending and saving less in response to interest rate increases and higher inflation
• facing a financial position that is worse than 12 months ago and that will be even worse 12 months from now
• finding that credit is harder to access now than it was 12 months ago and that it will be even harder 12 months from now

Compared with other individuals, respondents who have been negatively affected also expect:

• a greater chance of defaulting on their debt payments in the next three months
• a greater chance of losing their job in the next three months
• more of a decline in what they earn when compared with inflation
• more of a decline in their real spending

In follow-up interviews, respondents said that higher interest rates will have the biggest impact on renewing mortgages and that mortgage holders struggling to make payments could provoke a recession. Others said the impact of high inflation without wages catching up is an important reason for their more pessimistic outlook.

Chart 2-B: Consumers negatively affected by rising interest rates and high inflation are showing more distress than others

Chart 2-B: Consumers negatively affected by rising interest rates and high inflation are showing more distress than others

Did you become better or worse off as a result of recent interest rate increases/higher inflation?

Most respondents expect a recession in the next 12 months (Chart 7, panel a). That said, people are very uncertain about the economic outlook (Chart 7, panel b). This economic uncertainty is pushing some consumers to reduce their spending growth and build up their savings (Chart 8). “We are feeling more stress with the interest rates perhaps still going up. It is hard to see where things are going, so we are saving more because we don’t know if we are going to be able to afford things. It is a lot in our minds.”

Chart 7: Most Canadians expect a recession but are uncertain about it

Chart 7: Most Canadians expect a recession but are uncertain about it

Chart 8: Uncertainty is weighing on consumers’ spending plans

Consumers anticipate some relief in the housing market because they believe interest rates may fall earlier than previously expected. As a result, consumers expect home prices to grow modestly in the next 12 months, with expectations increasing for the first time since interest rates started rising (Chart 9). One consumer mentioned, “The Bank of Canada pause is a sign that things are getting a bit better.”

Chart 9: Consumers expect some recovery in home price growth

Note: This chart presents median values. For an explanation of the computation, see the Overview. The Overview also includes the survey questions.

Consumers report strong labour market conditions

Despite the cloudy economic outlook, consumers still see the labour market as healthy. Workers are confident in their own employment situation. They think there is a lower chance now of losing their job in the next 12 months compared with that possibility early in the pandemic. Indeed, many workers who are unsatisfied with their job notice plenty of job availability and are more willing than before the pandemic to change their job voluntarily. But not all available jobs are considered high quality. One respondent said, “There are a lot more jobs available,” while another remarked, “Not a lot of good jobs are available, at least in my field.”

Wage expectations also reflect a tight labour market facing the challenges of increasing the labour supply. Respondents’ expectations for wage growth in the private sector are near a survey high (Chart 1). And people outside of the workforce say they would need a much higher wage now to accept a job compared with what they would have accepted in the second half of 2021 (Chart 1).2 Of that group, seniors and women with young children reported the highest wages required to go back to work. Still, almost no workers think their wage growth will match their expectations for inflation over the next year.

Chart 10: Workers from a broad range of industries expect higher wage growth

* Earnings refers to earnings in the same job, for the same hours worked, before taxes and deductions.
Note: This question was not asked in 2019Q4.

Chart 11: Higher wages are likely needed to attract new workers

Chart 11: Higher wages are likely needed to attract new workers

Suppose someone offered you a job today in a line of work that you would consider. What is the lowest salary you would accept (before taxes and deductions) for this job? ($/hour)

Endnotes

The Canadian Survey of Consumer Expectations gathers respondents’ views on inflation, the labour market and household finances. Additional information on the survey and its content is available on the Bank of Canada website. The survey report summarizes opinions expressed by the respondents and does not necessarily reflect the views of the Bank of Canada.