Canadians think inflation is twice as high as it actually is, new BoC survey finds

The BoC said Monday that while its core measure of inflation now stands at just below 3.5 per cent, consumers surveyed said they perceived inflation to be a whopping 7 per cent. 

Respondents also told the Bank they expect inflation to stand at five per cent one year from now. 

Among young consumers, defined as adults aged 18 to 23, perceived inflation is even higher, with respondents telling the Bank they think inflation is running at nearly 10 per cent.

The Bank’s data indicates young consumers have always perceived inflation to be a bit higher than the rest of the adult population. 

But the split has not recently been nearly triple the actual measured rate of inflation.

The Bank calls this split “unusually wide,” and says respondents cited higher mortgage payments and continued food price inflation as the main drivers behind this perception. 

The Bank surveyed 2,000 consumers through Aug and Sept. 2023 to find not only their views on inflation, but also household finances and their expectations for the future. 

They found that inflation, and the high interest rate the Bank of Canada has set to try to bring inflation down, are having a profound impact on the choices made by everyday consumers.

And a significant share of mortgage holders are feeling the heat. 

The survey found that among variable-rate mortgage holders, a full 85 per cent of respondents said they are now “worse off” due to the overnight key lending rate rising to five per cent.

A further 26.5 per cent of respondents said their monthly payment is now approaching the maximum they can afford. 

Only 34 per cent of respondents told the Bank that their mortgage payments are “far below” the maximum they could afford. 

In response, the number one way consumers appear to be contending with inflation is to reduce spending:

The survey found consumers are “not planning to purchase items that are likely to be financed with a loan, particularly goods such as vehicles, appliances and home electronics.”

But it also found a majority of respondents are still planning to spend on experiences such as concerts and other services, but that this could be explained by pent-up demand that accumulated when such events were off limits during COVID-19 lockdowns. 

But overall, the current inflation environment has changed the average consumer’s behaviour in significant ways. 

One respondent to the Bank’s survey summed it up this way: “You don’t spend as quick as you used to. Pre-pandemic, if you wanted something, you bought it. Now, you think first if you need something before you buy it.”

But why do different groups of people perceive inflation differently? Why does it matter? 

In a report prepared for the Bank in 2023, economist Naveen Rai and analyst Patrick Sabourin say that “an increase in the share of people who expect high inflation in the short term has coincided with higher perceived current inflation.”

In short, higher inflation increases the number of people who expect inflation to continue in the future.  

Also, their report found that most consumers “associate higher expected inflation with worse economic conditions.” 

Furthermore, Google search interest in the term “Stagflation” — meaning rising inflation coupled with higher unemployment — hit a peak in Canada toward the end of 2022. 

Canada has not seen stagflation thus far, with unemployment sitting at 5.5 per cent for the third month in a row in September. 

The latest survey found that high interest rates “weighing on consumer sentiment generally.”

When asked about the possibility of recession, 55 per cent of respondents said they felt it was likely within the next 12 months, up 5 per cent from the previous quarter. 

And a majority of respondents say the impact of high rates is still unfolding.

More than 22 per cent of respondents said the impact of high interest rates is about halfway done, while 27.6 per cent characterized the impacts as “just beginning.”

Another 6.6 per cent of respondents said the impact of higher rates has not yet been felt at all.