(Ottawa) Not everything that goes up has to come down, despite what a surprisingly large proportion of respondents to the Bank of Canada’s most recent quarterly survey of consumer expectations would like to believe.
According to the results of this poll, released last week, more than a quarter of Canadians believe that consumer prices, which have risen with the highest inflation in several decades, will come down again within five years.
“What goes up must come down,” said one respondent in a follow-up interview.
This idea, however, was met with a raised eyebrow at the central bank.
The probability of deflation in five years is “extremely low,” said economics professor Stephen Gordon of Laval University.
While some prices will come back down, as has been the case with gasoline, Gordon notes that price increases for goods feed off each other in the supply chain and then escalate. implant in the economy.
“They start to become anchored in people’s expectations and they become a self-fulfilling prophecy,” he said.
Meanwhile, the Bank of Canada has indicated that the confusion between deflation (a decline in prices) and disinflation (a slowdown in price growth) cannot explain the high proportion of Canadians who expect deflation , since the difference between the two concepts was understood by the respondents of his survey.
The central bank regularly monitors inflation expectations in the economy to ensure that it has control over price growth. But now that annual inflation is well above its target level of 2.0%, inflation expectations are a major concern for the Bank of Canada.
If consumers and businesses expect inflation to remain high in the future, this expectation may convince businesses to raise prices and workers to demand higher wages.
Usually people expect to see deflation when the economy is not doing very well. However, the Bank of Canada pointed out that respondents who said they expected deflation were less likely than other Canadians to expect a recession in the next 12 months.
These respondents were indeed more likely to believe that inflation was caused by supply chain impediments. Once these temporary pressures are eliminated, many believe that the prices that have risen rapidly could then begin to decline.
Goods, but also services
Although TD Bank’s head of economics, James Orlando, believes deflation is unlikely at this time, he says he understands the logic behind these respondents’ feelings.
“Once the supply chains recover, and they recover very quickly right now, we would see more and more price cuts,” Orlando said.
Consumer price index data has already shown some price declines in recent months. For example, the prices of durable goods such as furniture fell between November and December.
PHOTO ALAIN ROBERGE, LA PRESSE ARCHIVES
Furniture prices began to decline.
However, that doesn’t mean the economy will see widespread deflation, Orlando said.
“If we don’t believe that headline inflation will be sustained in negative territory […]it is because we have to take into account that the economy is not only made up of goods, but also of services,” he said.
Services prices are fueled by wages, he continued, which are not likely to decline due to their persistent nature.
Although deflation might seem like good news at the time, Gordon warns that no one should wish it to happen.
Companies would have to be in very poor condition for firms to reduce prices. And if they were to find themselves in such a situation, they would probably cut jobs.
Stephen Gordon, professor of economics at Laval University
Alarm bells
Like high inflation, deflation would set off central bank alarm bells. According to Mr. Orlando, the Canadian economic system expects inflation to occur, and it is something that is embedded in its expectations.
If prices were to start falling, it would force the Bank of Canada to intervene to stabilize them.
For now, the central bank’s concerns are far from deflation.
Annual inflation stood at 6.3% in December in Canada, a notable improvement from the previous month. However, this is still much higher than the Bank of Canada would like.
Although some Canadians seem to believe that prices will “repair” themselves, the Bank of Canada is not counting on that and is preparing for another hike in its key interest rate on Wednesday. However, it could be the last for quite some time.
