Results of the second-quarter survey | Vol. 3.2 | July 4, 2022
This survey took place between April 28 and May 13, 2022.1 Follow-up interviews took place in June.
Overview
- Consumers’ expectations for inflation have risen, alongside concerns about prices for food, gas and rent. Short-term expectations are at record-high levels. Long-term inflation expectations increased significantly in the second quarter of 2022, returning to the levels they were at before the COVID‑19 pandemic.
- Most people believe the Bank of Canada can achieve its inflation target. However, some think the process of bringing inflation down will be difficult for the Bank of Canada.
- Expectations for higher inflation and rising interest rates are affecting consumer confidence. In response to such factors, Canadians plan to cut spending. They are seeking out more-affordable options when shopping.
- People anticipate that wage gains will remain modest. However, workers in the private sector have higher expectations for wage growth than those in the public sector. Flexible work arrangements could attract more people into the labour force. Some consumers reported that working from home helps offset the costs of higher inflation.
Inflation expectations have increased at all horizons
Expectations for inflation one year and two years from now continued to increase in the second quarter of 2022 and reached a new survey high (Chart 1, blue and yellow lines). Consumers expect inflation to be high for essentials such as food, gas and rent. This is a source of concern, especially for low-income consumers (Box 1). In follow-up interviews, one consumer said, “Food cost increases are drastic and worrisome.” Another noted that “inflation increased enormously in the last six months in almost all areas that touch people’s lives.” Generally, people see inflation as being more pervasive now.
Canadians think supply chain issues, the COVID‑19 pandemic and elevated government spending are driving high inflation (Chart 2). These factors are also seen as more persistent than in recent quarters. For example, more people now think it will take longer than two years to resolve supply issues. Some consumers believe the war in Ukraine is far from over and will lead to lasting higher prices for food and gas. Overall, Canadians are more uncertain now about how inflation will evolve, and survey respondents are more likely to have opposing views.
Chart 1: Inflation expectations have increased at all horizons
Chart 2: Consumers think supply chain issues are the main challenge in controlling inflation
| Category | 2022Q1 | 2022Q2 |
|---|---|---|
| Supply chain issues | 37.89% | 41.76% |
| Persistence of the pandemic | 31.18% | 23.7% |
| High government spending | 18.91% | 22.92% |
Consumers’ long-term expectations softened earlier in the pandemic but increased significantly in the second quarter to return to pre-pandemic levels (Chart 1, green line). Canadians think the likelihood of inflation remaining high for a long time has increased.
People believe the Bank of Canada can reduce inflation
Most respondents indicated the Bank has the credibility and tools to bring inflation back to target. Their belief in the Bank’s ability to achieve its inflation target has not changed materially since before the pandemic (Chart 3).
Chart 3: Canadians believe the Bank can achieve its inflation target
| Category | 2019Q4 | 2022Q2 |
|---|---|---|
| Never | 7.52% | 11.67% |
| Some of the time | 47.55% | 46.16% |
| Most of the time | 40.25% | 34.88% |
| Always | 4.67% | 7.28% |
Most respondents are aware that the Bank has raised interest rates, and some have noticed a slowing in the housing market. Those who have noticed a slowing in the housing market have more confidence that the Bank can achieve its inflation target. However, some consumers think reducing inflation will be difficult. Many are unsure about the impact of higher interest rates on inflation given that these higher rates also increase the cost of borrowing (Chart 4).
Chart 4: Many respondents are uncertain about the impact of higher interest rates on inflation
| Category | % |
|---|---|
| It will lower the inflation rate | 32.12% |
| It will raise the inflation rate | 24.6% |
| Its impact is uncertain | 43.28% |
Expectations for higher inflation and rising interest rates weigh on consumer confidence
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 5 summarizes consumer confidence based on results from a combination of survey questions related to these areas.2
Chart 5: Consumer confidence is weaker than normal in the areas of expected real wage growth and credit conditions
Chart 5: Consumer confidence is weaker than normal in the areas of expected real wage growth and credit conditions
Note: Each line represents 0.5 standard deviations from the historical mean.
Answers to survey questions on expectations related to real wage growth and credit conditions show that consumer confidence is weaker than normal (Chart 5). The indicator of consumer confidence in real wage growth is well below its historical average. Expectations for wage growth remain near 2%—workers do not anticipate their wage gains will keep up with inflation. The wage expectations of those in the private sector, who represent more than two-thirds of working respondents, have increased in recent quarters to roughly 3% (Chart 6). However, employees in the public sector still anticipate their wage growth will be muted.
Chart 6: Workers in the private sector expect larger wage gains than those in the public sector
The measure of consumer confidence in credit conditions is also below its historical average. This is because, compared with usual, consumers expect:
- more difficult access to credit
- increased probability of defaulting on debt
- higher interest rates
Confidence regarding labour market conditions and the general economic environment are above average. Consumer confidence in the labour market is high: Canadians feel positive about both their own work situation and the economy as a whole.
Consumers plan to spend significantly more over the next 12 months (Chart 7). Household spending growth will be supported by the extra savings some Canadians accumulated during the pandemic. As in the first quarter of 2022, consumers intend to spend about one-quarter of their extra savings over 2022 and 2023.
However, the quantity of purchases may decline. Canadians expect both spending and prices to increase but anticipate prices will increase by more, which means fewer purchases made per dollar spent. A reduction in the quantity of purchases may be tied in part to weaker-than-normal consumer confidence as people expect that credit conditions will worsen and wage growth will not keep up with inflation.
Chart 7: Expected growth in spending is not keeping up with expected price increases
Consumers reported that interest rate hikes would directly affect their spending (Chart 8). The survey asked what actions people would take in response to an increase of 1 percentage point:
- Most consumers who indicated they would take action said they would cut spending, increase their savings, postpone major purchases and pay down debt.
- Few consumers expect to make major purchases—such as a house, condo or furniture—earlier.
During interviews, some consumers mentioned that they had already locked in their car loans or mortgages before recent rate hikes, and this provides some insulation against higher interest rates in the short term. However, these consumers think that if inflation stays high and interest rates continue to rise, they will be significantly affected when their borrowing contracts are up for renewal.
Interview results also suggest that consumers’ spending on services is less sensitive to higher interest rates than their spending on goods. Respondents said that while they will cut back on big-ticket items, they expect to spend more on services as pandemic-related restrictions and their fears about COVID‑19 ease.
Chart 8: In response to interest rate increases, consumers would cut their spending and pay down debt
| Category | % |
|---|---|
| Cut back on spending and save more | 27.78% |
| Postpone major purchases | 13.81% |
| Pay debt | 12.62% |
| Make major purchases earlier | 7.4% |
Flexible work arrangements may bring more people to the workforce
Among respondents aged 18 to 54 years who are not in the labour force, more than half said they would consider looking for a job if they could work from home or had access to flexible work arrangements (Chart 9). In interviews, some respondents said that high inflation is one of the reasons these work arrangements are so attractive. If they can work from home, they would not need to spend as much on parking, gas, bus passes, lunches and clothes.
About half of respondents aged 18 to 54 years who are not in the labour force would also look for work if wages were better. In addition, in interviews, workers close to retirement age indicated that high inflation may keep them in the workforce for longer because they are concerned that their pensions may not keep up with the increase in the cost of living.
Chart 9: Flexible work arrangements and better wages could increase participation in the labour market
| Category | Aged 18 to 54 | Aged 55 to 70 |
|---|---|---|
| I would not return to work under any conditions | 17.69% | 75.15% |
| Ability to work from home | 53.79% | 16.16% |
| Flexible work arrangements and/or flexible hours | 54.56% | 11.75% |
| Better wages | 46.89% | 5.46% |
| Resolution of the COVID-19 virus | 14.61% | 6.13% |
| Work in a different industry or occupation | 13% | 3.53% |
| More affordable or flexible child care options | 15.08% | 0.53% |
Box 1: High inflation is putting stress on consumers
Inflation for essential goods and services has risen, stoking concerns among many people. Canadians have noted sizable increases in prices at the grocery store as well as reductions in quality and package sizes. Some groups are more vulnerable than others to higher prices for necessities. Lower-income Canadians and older individuals are more concerned about grocery prices and rent than younger respondents and households with higher incomes are (Chart 1-A). Younger people are more likely to be concerned about house prices than other groups because they may be considering buying their first house.
Chart 1-A: Lower-income Canadians are more concerned about grocery prices and rent
| Category | Below $40,000 | $40,000 to $100,000 | Above $100,000 |
|---|---|---|---|
| Groceries | 59.82% | 53.12% | 49.03% |
| Gasoline | 13.82% | 21.47% | 25.38% |
| House prices | 8.13% | 14.9% | 16.8% |
| Rent | 14.78% | 5.45% | 1.49% |
| Mortgage costs | 1.9% | 2.42% | 4.47% |
| Cars | 1.55% | 2.64% | 2.83% |
Chart 1-B shows that consumers, particularly those with low incomes, are adjusting to high inflation by:
- cutting spending
- postponing major purchases
- looking for discounts more often
- buying items that are more affordable
Compared with people in higher-income groups, more lower-income respondents mentioned cutting discretionary spending and focusing on necessities such as food and gas. For instance, one said, “I am now buying more of what I need, not what I want.” People now frequently shop around to find better prices, and they stockpile items that are on sale. Some consumers mentioned sticking to a strict budget for groceries by buying more generic products or not buying items deemed less necessary. Some are relying more on gardening for food or using cheaper forms of commuting, like biking. People expect the impact on their spending to be larger if inflation stays high for a long time. Results show that those who are expecting higher inflation have lower expectations for their future spending and are postponing major purchases.3
Chart 1-B: Lower-income groups are having to adjust more to inflation
| Category | Below $40,000 | $40,000 to $100,000 | Above $100,000 |
|---|---|---|---|
| I cut back my spending | 60.77% | 50.24% | 45.02% |
| I look for discounts, coupons | 60.64% | 58.6% | 50.86% |
| I buy more affordable goods and services | 48.37% | 46.88% | 37.17% |
| I postpone some purchases | 40.06% | 33.37% | 27.88% |
Endnotes
- 1. The Canadian Survey of Consumer Expectations gathers respondents’ views on inflation, the labour market and household finances. The online survey for the second quarter of 2022 was conducted from April 28 to May 13, 2022. Follow-up telephone interviews were conducted by the market research firm Nielsen on behalf of the Bank of Canada from June 3 to June 10, 2022. 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.[←]
- 2. Most of the summary measures are an average of results to survey questions; the real wage growth indicator is an exception. To compare across questions, the quarterly results are normalized—that is, (quarterly result minus historical average)/standard deviation. Real wage growth: wage growth expectations over the next 12 months minus inflation expectations over the next 12 months. Labour market conditions: probability of finding a job in the next 3 months, probability of leaving a job in the next 12 months, probability of losing a job in the next 12 months (negative impact on confidence). Household finances: expected total household income growth over the next 12 months, expected total household spending growth over the next 12 months. Credit conditions: interest rate expectations 12 months from now (negative impact on confidence), access to credit is easier versus harder 12 months from now (balance of opinion), probability of not making one of your debt payments over the next 3 months. General economic environment (each question asked to half the respondents): probability that the national unemployment rate will be lower 12 months from now, probability that the national unemployment rate will be higher 12 months from now (negative impact on confidence), probability that stock market prices will be higher 12 months from now, probability that stock market prices will be lower 12 months from now (negative impact on confidence).[←]
- 3. For more details, see M. Jain, O. Kostyshyna and X. Zhang, “How Do People View Price and Wage Inflation?” Bank of Canada Staff Working Paper (forthcoming).[←]