With trade wars breaking out on multiple fronts, consumers and businesses are sending mixed signals to the Bank of Canada. On the one hand, they expect inflation to jump higher over the next year. One the other, both groups plan to scrimp and save.
That’s a recipe for stagflation. But in the coming months, economists say, the central bank is going to be a lot more worried about the latter – and the threat of slower growth – as it charts a path for interest rates.
When the bank trimmed its benchmark interest rate to 2.75 per cent on Wednesday, it released the latest results of surveys it conducts of consumers and businesses. While the annual pace of inflation has generally been on a downward trajectory for more than two years, and measured 1.9 per cent in January, households fear the barrage of tariffs Canada and the U.S. have slapped on each other will push the inflation rate to 4.1 per cent over the next year.
Likewise, business leaders surveyed in February expect inflation to climb over the next 12 months to 3.3 per cent.
Yet the surveys point to an economy that is clamping down, with households stockpiling savings and planning fewer major purchases, while businesses intend to scale back their hiring and investment plans.
In weighing that feedback the bank “implicitly put more weight on those downside risks to growth, and their implications for economic slack, than on the survey results on inflation,” wrote Avery Shenfeld, chief economist at CIBC, in a note this week.
That lines up with the bank’s own research, he continued, which suggests any increase in the inflation rate from tariffs “will be offset over the medium term by the disinflationary impact of rising unemployment, weaker income growth and the resulting hit to household spending power.”
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What creative displays of Canadian patriotism have you seen?
Canadians are fighting back against growing U.S. tariff and annexation threats in a number of ways, not least of which through our unique brand of humour. From signs poking fun at our neighbours to ordering 'Canadianos' at your local café, we want to hear about the small (and often hilarious) acts of defiance you've seen. If you'd like to send us a photo related to your submission, send it to us in an email at audience@globeandmail.com.