(Bloomberg) — Canadian business and consumer expectations of inflation over the next couple of years is at a record, according to the country’s central bank, a worrying development that will stoke bets of more aggressive rate hikes.

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The Bank of Canada’s quarterly survey of executives and businesses released on Monday show that short-term inflation expectations are rising, with price pressures expected to persist for longer as the country faces tight labor markets and companies get hit by rising input costs.

The rising cost and inflation outlook illustrates the urgency for Governor Tiff Macklem to quickly withdraw stimulus from an overheating economy amid concerns that price pressures are becoming entrenched.

Expected price gains are a key determinant of actual inflation. Businesses increase prices and workers seek pay raises in part on what they anticipate costs will look like going forward. In other words, the higher inflation is expected to be, the higher it will be.

Markets are almost fully pricing the central bank will hike its policy rate — currently at 1.5% — by another 75 basis points at its July 13 decision. The bank is expected to raise it to as much as 3.5% by the end of this year. The policy rate was as low as 0.25% in March.

The executive survey paints a picture of businesses facing unprecedented challenges meeting demand, with the economy pressed up against its limits.

On a positive note, the central bank said there’s still confidence that the Bank of Canada can achieve its inflation target and that price pressures will eventually ease.

More Highlights:

  • Consumer expectations for inflation rose across all time horizons, with one-year and two-year hitting records. Five- year inflation expectations also increased significantly, but still remain slightly below pre-pandemic levels

  • The central bank said consumer spending could be hit by higher inflation, with confidence down and with households still expecting only moderate wage gains. Wage gains expected by businesses are higher than what households expect

  • About 78% of businesses expect inflation to exceed 3% over the next two years, easily a record. That’s up from 70% three months earlier

  • While businesses expect sales growth to slow, demand conditions remain strong

  • Firms are constrained by lack of workers and supply chain bottlenecks, “suggesting that supply is not keeping up with demand”

  • Businesses anticipate “significant” wage and price increases, with supply chain bottlenecks now expected to persist for longer. Investment intentions and hiring remain elevated, but so are wage expectations. The average expected wage increase is now at 5.8% next year, a record

  • The broad gauge of business sentiment fell slightly but remains at historically elevated levels. The central bank’s composite indicator of business conditions fell to 4.85, from 5.01

  • The Bank of Canada said that uncertainty around the economic outlook has increased over the past three months. “Most firms saw this uncertainty as creating risks to their outlook but not yet further affecting their operations or sales expectations”

Story continues

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