Results of the third-quarter survey | Vol. 3.3 | October 17, 2022

This survey took place between August 2 and August 23, 2022.1 Follow-up interviews took place in September.

Overview

• Expectations for inflation one to two years ahead have continued to rise because consumers anticipate supply chain disruptions and elevated oil prices will persist. In contrast, expectations for inflation five years ahead have eased to near pre-pandemic levels. Still, consumers are more divided this quarter about where inflation will end up in the long term.
• Most consumers are aware that the Bank of Canada has raised interest rates, but many are uncertain about how these increases will affect inflation.
• Canadians are optimistic about labour market conditions. However, falling real wage growth and tighter credit conditions are weighing on their confidence, and most expect a recession in the next 12 months.
• Workers believe their wage gains are not keeping up with inflation and will not catch up. They reported coping with higher inflation by cutting spending and changing their shopping habits. Remote work policies are compensating, to a certain extent, for falling real wages.

Short-term inflation expectations remain elevated

Despite lower gas prices, consumer expectations for inflation one and two years ahead continued to edge up (Chart 1). At the same time, inflation expectations at all horizons are now below the current perceived rate of inflation, indicating that consumers think inflation will slow.

Generally, consumers still believe external factors, including supply chain issues and oil prices, will drive high inflation for another year or two.

Views on domestic factors affecting inflation are now more polarized, and some people think high government spending and price gouging by domestic retailers are also playing a role. Results of follow-up interviews indicate that some see high inflation as pervasive, with no declines in the prices of food or other products. One person said, “Prices are high everywhere and are affecting many parts of my life.” Another said, “People are struggling just to meet basic needs.”

Chart 1: Short-term inflation expectations are creeping up despite falling gas prices

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.

In contrast, expectations for inflation five years from now edged down this quarter and are now near pre-pandemic levels. This decline in long-term expectations suggests that people still anticipate that inflation will return to normal.

In this environment of persistently high inflation, the spread of five-year-ahead expectations increased sharply (Chart 2). The share of consumers who think inflation will be high in the long run has increased. At the same time, more consumers think prices could grow at a slower rate or even decline.

Chart 2: Disagreement about long-term inflation expectations is spiking

* Dispersion is measured as the difference between the 75th and the 25th percentiles of the distribution of responses.

Consumers remain very concerned about inflation and are paying more attention to it. Many express an understanding of what inflation means, and more people than before are aware of the Bank’s inflation target. However, when respondents were asked to name the inflation target, the average answer was above the true target and has increased compared with previous surveys. This is particularly the case among those who were not aware that Canada has an inflation target (Chart 3). These respondents are also more likely to have higher long-term inflation expectations.

Chart 3: The perceived inflation target is high and increasing

The aim of the Bank’s interest rate policy is widely understood. A majority of respondents know that increases in interest rates are intended to bring inflation down. Despite this understanding, significantly fewer people expect these actions to work (Chart 4). In interviews, consumers said the Bank’s rate hikes are not having the desired effect. One person said, “Interest rates have been going up quite a bit, but inflation is still very elevated.”

Chart 4: Many people think rate increases will not reduce inflation

Chart 4: Many people think rate increases will not reduce inflation

In your view, what does the Bank of Canada aim to achieve by increasing rates? In your view, how do you think increasing rates will affect the inflation rate?

Most workers believe their wage gains are falling short of inflation (Chart 5). The majority feel their wages will not catch up. Further, high inflation has motivated a few workers to ask for higher wages or to switch to higher-paying jobs. Although a strong majority of workers reported that their pay is not automatically adjusted for inflation, the share reporting inflation adjustments edged up modestly this quarter. For more details on wage expectations, see Box 1.

Chart 5: Workers view their recent wage gains as lower than inflation

Chart 5: Workers view their recent wage gains as lower than inflation

How does your recent wage adjustment compare to actual inflation?

* Net measures the share of respondents with wage adjustments lower than inflation minus the share of respondents with wage adjustments higher than inflation.

Consumers think the state of the economy is worsening

Consumers’ confidence is influenced by their views about different aspects of economic life, ranging from expectations about the economy in general to their own labour situation and earnings, household finance and credit conditions. Chart 6 summarizes consumer confidence based on results from a combination of survey questions related to these areas.2

As in the previous quarter, consumer confidence is weaker than normal for expected real wages, credit conditions and household finances. For credit conditions, this weakness reflects higher interest rates, an increased probability of defaulting on debt, and harder access to credit. For household finances, it is due to expectations that spending will not keep up with inflation.

In contrast, consumers’ confidence regarding labour market conditions is stronger than average—including both for their own situation and for the broader economy. The perceived likelihood of voluntarily switching to a new job is at a survey high, and workers’ perceived chance of losing their job remains below average.

Chart 6: Consumer confidence remains weaker than normal

Chart 6: Consumer confidence remains weaker than normal

Note: Each line represents one standard deviation from the historical mean. Results closer to the centre suggest lower-than-average confidence.

Despite the positive views about labour market conditions, most consumers think the chance of a recession is at least 50% (Chart 7). This sentiment is broad-based across different groups.

Consumers expressed a variety of views regarding the actual and future states of the Canadian economy. During interviews, several mentioned that Canada may already be in a recession—they think that the economy has not fully recovered from the pandemic and that high inflation and rising interest rates are making things worse. Others, putting more weight on strong labour market conditions, said the economy is in good shape.

Chart 7: Most consumers think a recession is likely

Note: Respondents were given discrete choices.

When asked which factors would most likely trigger a recession in Canada, survey respondents indicated that the three most important are:

• wages not keeping up with inflation
• high prices reducing consumption
• interest rates increasing substantially (Chart 8)

Chart 8: Consumers see shrinking real wages, high prices and rising interest rates as the main triggers of a recession

Chart 8: Consumers see shrinking real wages, high prices and rising interest rates as the main triggers of a recession

What do you think will most likely trigger a recession?

More than 80% of respondents are taking actions to cope with higher inflation (Chart 9). Consumers are reducing their spending—nearly half of respondents reported buying less, and more than one-third are restricting their purchases to necessary items. At the same time, consumers are also changing their shopping habits—they are buying more items on sale, shopping around more to get the best prices and checking the flyers more often to find specials.

During interviews, some people reported the need to shop more carefully. Many consumers think now is not a good time to make a major purchase because prices are high, choices are limited, delays are long, and the likelihood of a recession is elevated. They will restrict their major purchases to critical needs, for example, a broken appliance that must be replaced.

Chart 9: To cope with higher inflation, consumers bought less and searched for sales and best prices

Chart 9: To cope with higher inflation, consumers bought less and searched for sales and best prices

How have you changed your shopping habits because of higher inflation, if at all? (share of respondents who selected each shopping habit)

Interview results show that respondents with higher levels of debt are more likely to be negatively affected by rising interest rates. This is particularly true for those who have recently bought a house or done major renovations using their line of credit. Renters and pensioners reported not being affected as much by rising interest rates because they had reduced or had not accumulated debt during the pandemic.

Rising interest rates seem to be affecting consumer expectations about house price growth, which fell significantly but remain positive. The share of respondents expecting house prices in Canada to fall over the next 12 months increased significantly this quarter. But interviews suggest that most of these respondents think this decline will be temporary given the current strength in housing demand. Consumers report that in forming their house price expectations, they consider fundamental drivers such as credit conditions, housing supply and population growth.

Despite rising interest rates, housing market activity remains high (Chart 1). The likelihood of buying, selling or moving into a home remains at or above the survey average.

Chart 10: Housing market churn remains high

Box 1: Wage expectations are increasing but remain below inflation

Overall, expectations for wage growth have increased only modestly despite high inflation. Nearly one-third of workers report being unable to negotiate their wages, and nearly one-fifth say their employers are still hindered by the pandemic. These factors are limiting wages. The impression that wages are not keeping up with inflation is a growing source of dissatisfaction among some workers. Indeed, some believe they will become worse off financially in the next year.

Still, the share of people anticipating higher wage growth has picked up. Around 40% of workers now think their wage growth over the next 12 months will be above 4%. This is particularly the case for some workers in the private sector (Chart 1) and for low-income workers. Those who see the labour market as improving tend to have higher expectations for wage growth.3 Some others said their union is making more of an effort to get better wages but that it will take time.

Chart 1-A: Wage growth expectations for private sector workers increased again

* 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.

The availability of remote work has helped keep some people satisfied with their pay (Chart 1). Workers report that being able to work remotely has a significant impact on their desire to ask for additional compensation. When asked how much their wages would have to increase if they were required to return to the office, nearly 40% said their wages would need to increase by more than 4%. In interviews, workers said remote work helps them save money on gas because they live or have moved far from their workplace. One said, “For work, I prefer a hybrid model because it motivates me to go to the office, but it is much more expensive to drive to work since I live far away.”

Chart 1-B: Remote work is softening wage demands

Endnotes