Quick take

Consumers Tread Cautiously as Canada Enters the Fall Season

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  • After increasing 2.3 points in August to 75.1, the Index of Consumer Confidence remained relatively unchanged in September at 75 points (2014 = 100).
  • Although households continue to feel the pinch of increased prices, optimism over current finances increased by 1.3 percentage points to 12 per cent. This is a subtle signal that sentiment might change in the coming months if price growth continues its downward trend. In the meantime, those sharing a pessimistic view remained relatively unchanged at 33.4 per cent compared to the previous month.
  • Optimism over households’ future finances increased by 0.6 percentage points this month to 15.8. This increase in positive sentiment is likely due to lower price growth and lower inflation expectations over the next year. The slight increase indicates that consumers might be less concerned that their purchasing power could erode further in the coming months.
  • Canadians are less confident about job prospects. The share of consumers confident in job prospects decreased this month by one percentage point. Only 15.8 per cent of Canadians are positive that more job opportunities will be available six months from now, the lowest this year. This is no surprise as inflation is still high – albeit declining – and interest rates are expected to rise further, leading to softer demand and weak job growth.
  • With 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. Positive sentiments on major spending still have a long road to recovery compared to the 2019 average of 31 per cent.

Key Insights

Consumer confidence is roughly at the same level it was in the Fall of 2020. At 75 points, the index is currently 37.8 per cent lower than its pre-pandemic level. With confidence this low, the likelihood that consumer confidence will sink drastically lower is unlikely. Consumer confidence tends to fall quickly, while the rebound takes time and needs months of a conducive economic environment to avoid any trepidation by consumers. The good news is that headline and core inflation are coming down. The bad news is that interest rates will continue to rise. Consumers will be cautiously optimistic over the next couple of months, carefully watching Bank of Canada’s interest rate hikes and inflation trends, before changing their consumption patterns and sentiment.

Affordability remains a key concern as gasoline got cheaper, but food prices increased. The cost of groceries has risen by 10.8 per cent in the past year. That's the fastest increase in the typical grocery bill in more than 40 years. If prices of everyday food items continue to rise, the recovery of consumer confidence will be slow. What’s more, driven by higher interest rates, mortgage interest costs increased by 4.8 per cent (y/y) in August. Though house prices are falling, higher interest costs and rising rents are making housing less affordable for low and medium-income Canadians, thus forcing most of them to pull back on discretionary spending.

With long-term (three-year) inflation expectations continuing to decline, short-term (one-year ahead) expectations dropped for the first time since April. This signals that consumers are confident that inflation will be tamed in the long run while also remaining less concerned about inflation making a rebound any time soon. This should be encouraging news for the Bank of Canada as it shows that inflation is not being entrenched and they have inflation under control. Meanwhile, though nominal wages are rising given the still-tight labour market, they are rising slower than inflation. This means average real wages continue to decline. Still, declining inflation expectations could help avoid the wage-price spiral and may allow employers to not pencil in wage increases based on today’s price growth, which is well above the Bank of Canada’s upper target limit of 3 per cent.

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Momanyi Mokaya

Momanyi Mokaya

Research Associate

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