While inflation expectations among businesses are steadily falling, Canadian consumers continue to expect elevated price growth in the near term.

The Bank of Canada’s two key surveys also found an overall improvement in sentiment in the first quarter among both consumers and businesses, despite the drag continued high interest rates are placing on the economy.

Among the findings, the Bank also reported that more consumers are considering or planning to purchase a home in the next 12 months (more details on that below).

Businesses see pricing behaviour normalizing

While demand remains weak, business leaders report a returning sense of optimism, particularly when it comes to business conditions, sales outlooks and employment intentions, according to the Q1 Business Outlook Survey, which is based on interviews with senior management from roughly 100 firms.

“…firms hampered by reduced consumer spending over the past 12 months expect their sales growth to increase over the next 12 months,” the report reads. “Among businesses anticipating that sales growth will improve in the next year, around half pointed to their expectations that interest rates will decline.”

Inflation expectations among businesses also continued to decline in the quarter, with firms believing current monetary policy is working to relieve upward inflation pressures.

In particular, just 27% of firms now think inflation will persist above 2% beyond three years from now. That’s down from 37% in the previous quarter.

As of February, Canada’s headline inflation rate was 2.8%, now within the Bank of Canada’s neutral target range of between 2-3%.

Firms also expect wage growth to be slower in the next 12 months compared to the past 12 months. However, expected wage growth of 4.1% in the coming year remains well above the historical average of 3.1%.

“Businesses’ pricing behaviour is continuing to normalize,” The BoC noted in its report. “But the slow moderation in wage growth and the gradual pass-through of high costs are keeping output price growth elevated.”

Consumers expect near-term inflation to remain high

Meanwhile, the Bank of Canada’s Q1 Survey of Consumer Expectations found that while consumers believe inflation has slowed, they continue to expect near-term inflation to remain high.

“Consumers frequently reported that their own experience with prices when they shop is a key contributor to their perceptions of inflation,” the report noted, adding that 60% of respondents said food prices weighed heavily on their perceptions of inflation.

Consumers also said high interest rates are contributing to their expectation that inflation will remain high in the near term.

“Consumers still feel the negative effects of inflation and interest rates on their spending, and the cost of living remains their top financial concern,” the report reads. “However, the share of consumers feeling worse off is slightly smaller than it was last quarter—a sign that the negative impacts of inflation and interest rates are no longer broadening.”

More people say they are planning to buy a home

As mentioned above, the findings also revealed an increase in the percentage of respondents saying they are considering or planning to purchase a house or condo in the coming year (nearly 15% vs. roughly the 2023 average of roughly 13%).

However, the BoC cautioned that this increase is “likely driven in part by newcomers, who typically have stronger buying intentions than other Canadians.”

In addition to high mortgage costs, consumers report that high home prices, limited supply and “considerable difficulty” for renters to save up a down payment as being key barriers to homeownership.

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Bank of Canada Bank of Canada Business Outlook Survey boc surveys business outlook survey consumer expectations consumer sentiment consumer survey homebuying intentions

Last modified: April 3, 2024