Not exactly what we wanted to hear

The Bank of Canada released its quarterly Survey of Consumer Expectations today. There's plenty in it for the Bank's policymakers to contemplate as they prepare for their next rate decision, due on July 13.

Even as the Bank has embarked on its tightening cycle, it has repeatedly admitted that there is little that it  can directly do to calm the current inflation spike, given that said spike is largely the result of global supply chain issues. The principal goal of its policy moves has been to curb any run-up in inflation expectations, so as to ensure that higher inflation does not become entrenched in the economy even after supply issues ease.

Data in the survey suggest that inflation expectations are indeed rising significantly, for both the short, medium and long term. Expectations for inflation one year out are close to 7 percent, up from just over 2 percent at the start of 2021. (As a reminder, headline CPI was up 7.7 percent in May).  For the two-year horizon, the expectation is just over 5 percent, and for five years it is still well above the Bank's target, at 4.0 percent.

That's not good news, but other elements of the survey are a little more comforting. The survey shows that more than 40 percent of Canadians correctly see supply chain issues as the key driver of inflation. That compares to around 20 percent each for the main alternative explanations: the pandemic and high government spending.  As an aside, this last point suggests that Tory leadership hopeful Pierre Poilievre's  incessant carping about "Justinflation" is not really hitting the mark; not that he's likely to stop. 

The survey also shows that about 80 percent of Canadians think the Bank of Canada can achieve its inflation target either "most of the time" or "some of the time".  Fewer than 12 percent think it can "never" hit the target. Interestingly, almost 8 percent of Canadians responded "never" to this question back in 2019, a time when the country had enjoyed many years of inflation at or below the target level.

The survey tells us there is work for the Bank to do. Inflation expectations of 4 percent over a 5-year time horizon are not something policymakers can feel comfortable about. Markets seem convinced that next week will bring a 75 basis point rate hike. That's very aggressive by recent historical standards, but you wouldn't bet against it.