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Canada is Facing Inflation and Elevated Wages

In: Finance, Forex

Canadian businesses are facing unprecedented challenges meeting demand, along with elevated expectations for wages and inflation that will bolster bets for aggressive rate hikes from the Bank of Canada.

The central bank’s quarterly survey of executives paints a picture of an economy still pressed up against its limits. Four-fifths of companies said they would have at least some difficulty meeting unexpected demand, a record. About 70% of respondents expect annual consumer price gains to surpass 3% over the next two years, also a record, with reports of higher expected wage growth pervasive.

The rising cost and inflation outlook will only cement bets that the Bank of Canada is poised to drive up borrowing costs sharply in coming months. Markets are pricing in a nearly 80% chance the central bank will hike its policy rate, currently at 0.5%,  by half a percentage point at its April 13 decision, and raise it to as much as 3% by this time next year.

The number of firms reporting capacity pressures related to labor or supply chain challenges is at a record high, because of persistent capacity pressures and strong demand, firms expect significant growth in wages, input prices and output prices.

The Canadian dollar extended gains on the report, and was up 0.4% to C$1.2473 per U.S. dollar. “If we still needed to cement the case for a half point rate hike in April, the Bank of Canada’s Business Outlook survey provided it, and the near term inflation pressures highlighted in the survey are what make a 50 basis point move in April look like a reasonable step at this point,” said Avery Shenfeld.

A broad gauge of business sentiment fell slightly from record levels, in part because sales growth is expected to slow. The central bank’s composite indicator of business conditions fell to 4.98, from a record high 5.90 in the fourth quarter.

About half of companies surveyed said they expect sales growth to decline over the next 12 months, and indicators of future sales are easing. But sales remain strong, the Bank of Canada said. Expectations for investment in machinery and equipment and hiring also remain elevated, though down from the end of last year.

Canadian households also expect inflation to stay above 3% over the next couple of years. Asked what they expect the rate of inflation to be in the future, Canadians saw it at 5.07% in the next year and 4.62% in two years. That’s higher than three months ago. Within five years, inflation is seen at 3.23%.

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