Canadians brace for higher inflation as Bank of Canada weighs rate hikes

A new poll reveals that over half of Canadians anticipate higher inflation in the coming year, a development that could complicate the Bank of Canada’s decisions on future interest-rate hikes. According to a Nanos Research Group survey for Bloomberg News, 54% of Canadians believe the yearly change in the consumer price index will exceed the current 3% by this time next year. Only 7% think inflation will decrease, while about a third expect it to remain stable.

The data raises concerns for central bankers who are monitoring whether consumer inflation expectations are drifting away from the bank’s 2% target. Nik Nanos, founder and chief data scientist of the polling firm, described the findings as reflecting an "anxious, dour mood" among Canadians, highlighting their awareness of limited control over global economic issues.

Persistent elevated inflation expectations could lead Canadians to seek larger wage increases or make earlier purchases, potentially fueling further price pressures. Bank of Canada Governor Tiff Macklem recently warned that delayed action on sustained high inflation might necessitate higher and faster rate hikes. However, raising borrowing costs too aggressively could stifle economic growth during uncertain times.

Inflation in Canada has been influenced by rising gasoline prices since February, driven by the war in Iran, which triggered a global oil shock. The Bank of Canada is uncertain whether high gas prices are spilling over into broader price pressures and is debating whether the current policy rate of 2.25% is adequate to manage inflation. Traders currently see a one-third chance of a rate hike at the next meeting on October 28 and anticipate more than 100 basis points of hikes over the next year.