Quick take

Consumer Confidence Sinks Lower

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  • After dropping 8.8 points in June, the Index of Consumer Confidence fell a further 6.6 points in July to 72.8 (2014 = 100).
  • Many households continue to feel inflation’s squeeze, with optimism over current finances dropping to 11.4 per cent. In the meantime, those sharing a pessimistic view of their current finances increased to 33.3 percent.
  • Optimism over households’ future finances dropped by 1.2 percentage points this month. This increase in trepidation is likely due to higher interest rates and higher inflation expectations over the next year. The increase indicates consumers are concerned that their purchasing power could erode further in the coming months.
  • Canadians are less confident about job prospects. The share of confidence in job prospects decreased this month by 1.6 percentage points, with only 17 per cent of Canadians positive that more job opportunities will be available six months from now. This is no surprise as we witnessed a drop in employment in June.
  • With the policy rate up 100 basis points and even higher interest rates on the horizon, only 11 per cent of survey respondents believed that now is a good time to purchase large-ticket items. This is a decrease of one percentage point from last month’s outlook. Furthermore, positive sentiments on major spending still have a long road to recovery compared to the 2019 average of 31 per cent.

Key Insights

This month recorded an increase in the short-term (one-year) inflation expectations, with the long-term (three-year) outlook also seeing a modest increase. This signals that consumers are confident that inflation will be tamed in the long-run but remain worried about the immediate future. Inflation expectations are crucial in determining where wages and prices are headed. Consumers are concerned about how much purchasing power they have with their real wages. While nominal earnings continue to rise due to labour market tightening, real earnings are slowly diminishing. Rising inflation expectations continue to affect the consumer psyche and consumers continue cutting spending and seeking more affordable options. If we start the journey up the undesirable wage-price spiral, the trip will not be worth taking.

Affordability remains a key concern as prices continue to soar and interest rates creep higher. This forces households, particularly low and medium-income ones, to pull back on discretionary spending. Worse, any higher-than-expected rise in inflation may push a greater dose of monetary tightening, weakening consumers’ impetus to spend on crucial goods and services. Rising prices disproportionately affect low-income households, thereby widening income inequality. It would be a policy challenge to help these groups deal with price increases without making inflation worse overall.

With inflation at its highest level since the early 1980s, not all is dark and gloomy for the consumer. Evidence is building that headline inflation is slowing and may have reached its peak value. On a seasonally adjusted monthly basis, the CPI went up 0.6 per cent in June, which was lower than the increase of 1.1 per cent in May. Ocean shipping costs have declined, and commodity prices have edged lower. Furthermore, prices at the pump are also lower this month than in June. Still, this should keep the year-on-year (y/y) numbers undesirably higher through 2022. However, the deceleration is evident and should give some consumers some glimmer of hope.

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Momanyi Mokaya

Momanyi Mokaya

Research Associate

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