Canadian Survey of Consumer Expectations—First Quarter of 2022

Results of the first-quarter survey | Vol. 3.1 | April 4, 2022

This survey took place in mid-February 2022 before Russia invaded Ukraine on February 24, 2022.1 Follow-up interviews took place in March and provide some insight into how consumers perceive the effects of the conflict.

Overview

• Short-term inflation expectations have reached record-high levels. Many survey respondents think inflation will be higher over the next two years because of supply disruptions and the COVID‑19 pandemic. This includes inflation for essentials like food, gas and rent.
• Most believe that supply issues will impact inflation for at least two years and will impede authorities’ ability to control inflation. Consumers think the Russian invasion of Ukraine will make high inflation worse.
• Despite greater concerns about inflation today, longer-term expectations have remained stable and are below pre-pandemic levels. This suggests that long-term inflation expectations remain well anchored and that survey respondents believe the current rise in inflation will not last.
• Although workers anticipate significant price increases in the near term, they believe their wages will increase only modestly. This is a source of dissatisfaction for them.
• Workers’ expectations for voluntarily leaving their job have increased to a survey high, suggesting healthy labour market churn ahead.
• Despite expecting higher interest rates, consumers continue to anticipate strong spending growth on a broad range of goods and services.

Consumers think inflation will be high for the next two years

Expectations for inflation one year and two years from now continued to increase in the first quarter of 2022 and reached survey-high levels (Chart 1). These views include inflation expectations for food, gas, rent and other essentials. Notably, high inflation expectations for essentials tend to have an oversized impact on consumer expectations for overall inflation. In this quarter, respondents are less certain about their own inflation forecasts; however, uncertainty is not as high as it was at the start of the pandemic. Survey results for this quarter show wider-than-usual disagreement among respondents about what inflation will be in the future.

Consumers are more concerned about inflation than they were before the pandemic and believe that controlling inflation has become more difficult for authorities. They think price pressures are broadening. Survey respondents believe the following issues are making inflation harder to control:

• supply chain issues
• the persistence of the pandemic
• high government spending (Chart 2)

Most expect supply chain issues to persist for at least one to two years (Chart 3). In follow-up interviews, some respondents said the invasion of Ukraine may cause supply chains to be rerouted and become more local, leading to higher prices for essentials. For example, one respondent noted that the cost of filling a Honda Civic increased recently from $40 to $70. Respondents also suggested that prices will likely not decline even after supply chain issues are resolved because businesses need to restore their profit margins.

Increases in near-term inflation expectations, however, are not feeding into those for the longer term. Consumers’ long-term expectations remained relatively stable in the first quarter of 2022 and below their pre-pandemic level (Chart 1). This suggests that inflation expectations are well anchored. Survey respondents generally feel that once the pandemic ends and supply issues fade, the Bank of Canada will be able to achieve its inflation target.

Workers anticipate modest wage growth

Despite price pressures, workers expect wage increases to remain moderate (Chart 4). This suggests that the link between inflation and wage growth remains weak.

Expectations for modest wage gains can be attributed to several factors:

• About one-quarter of workers reported that their wages were adjusted recently. The majority of these workers (60%) noted that their recent increase in pay was below inflation at the time (Chart 5). Indeed, many respondents are not satisfied with their change in pay (Chart 6).
• Respondents indicated that some employers continue to be negatively affected by the pandemic. Weak sales reduce firms’ profitability and, in turn, their ability to offer wage adjustments. In the public sector, people believe the lack of wage adjustments is because of legislation in some jurisdictions or high government debt. Many respondents said they do not have the ability to negotiate their wages. Yet, survey results indicate that bargaining power is key for better wages. Ability to negotiate is associated with higher past wage gains and higher expected future wage gains (Chart 7).
• Changing jobs helps workers improve their wages. Those looking for a new job (about 20% of respondents) expect higher wage increases than those who are not looking. Workers’ expectations about the probability of leaving their job voluntarily have increased and are at a survey high, likely reflecting a healthier labour market with more opportunities (Chart 8). Some workers, however, continue to see an elevated risk of losing their job.
• In follow-up interviews, some people expressed hope that reopening the economy and ending pandemic restrictions may lead to higher wages.

Consumers plan to spend more, despite expecting higher interest rates

Consumers expect the strong growth in their spending to continue. They intend to increase spending on a broad range of goods and services as pandemic restrictions are lifted and the economy reopens. In follow-up interviews, some respondents said they are less fearful about the health impacts from COVID‑19 given the improvement in collective immunity. Respondents think that a drop in the number of virus cases combined with the removal of more restrictions (e.g., mask mandates have ended in many regions) will play a positive psychological role and boost consumer confidence. Spending should benefit from the anticipated use of some of the extra savings accumulated during the pandemic—consumers intend to spend about one-third of these savings over 2022–23. The demand for housing remains strong. Respondents are more likely now than before the pandemic to move to a different primary residence over the next 12 months, and they anticipate spending more on shelter over the next year.

Consumers’ responses indicate that spending for durables may be facing some headwinds:

• Consumer spending on motor vehicles and appliances may be weighed down by interest rate hikes. Spending expectations are lower among those who think interest rate increases are more likely than among those who think they are less likely (Chart 9). Moreover, it is becoming harder for people to make their debt payments (Chart 10). One respondent expressed concern that as interest rates continue to rise, people with a lot of debt will suffer.
• Results from follow-up interviews show that increased spending on essentials because of higher prices has led to tighter household budgets, especially for lower-income households. This greater spending on essentials is squeezing out other purchases and curtailing plans for vacations.