Households Continue to Feel Inflation’s Squeeze

Canadian Economics

  • The Index of Consumer Confidence decreased by 2.7 points in February to reach 71.4 points—21.7 points lower than a year ago.
  • Many households continue to feel the pinch of inflation—especially at restaurants and grocery stores, with optimism over current finances edging lower this month to 11.9 per cent. Meanwhile, the share of those who felt pessimistic towards current finances rose to 35.2 per cent, a 2.2 percentage points increase from January.
  • Concerns over households’ future finances rose in February. Of those surveyed, 27.1 per cent felt that they will be financially worse off six months from now—a 1.6 percentage points increase from January. At the same time, the share of respondents that felt optimistic about future finances rose by 0.3 percentage points to settle at 16.7 per cent. Still, the proportion of respondents with a negative outlook on future finances outweighed the share of those who felt positive towards their future financial situations.
  • Even though there were around 150,000 jobs added to the labour force in January, 21.7 per cent of respondents believed there would be fewer jobs six months from now. Meanwhile, only 14.9 per cent of respondents had a positive outlook on future job prospects.
  • The share of respondents who believed it was a good time to make major purchases fell by 0.4 percentage points to settle at 10.1 per cent. On the other hand, 66.9 per cent felt it was not a good time to spend big—a 1.7 percentage points increase from January. Higher borrowing costs have affected consumers’ willingness to spend on big-ticket items, which explains the divergence between the shares of positive and negative views towards major purchases over the last several months.

Key Insights

Inflation eased to 5.9 per cent year-over-year, but food and shelter prices remain a concern for households. The Bank of Canada’s actions to tackle inflation seem to be working, but it has come at the expense of higher borrowing costs. Mortgage interest rate costs are higher and demand for durables has declined. This has profoundly affected consumer sentiment towards major purchases—most responders believed February wasn’t a good month to spend big. Households are also faced with higher food prices. The Bank’s tightening monetary policy has had little to no impact on food inflation because many global factors have placed upward pressure on Canada’s food production costs. Until external pressures ease, we may see elevated prices for several months. Even though year-over-year inflation has fallen, Canadians are still feeling the pinch when it comes to rent, food, and gasoline prices. What’s more, 35.2 per cent of respondents felt that their financial situation is worse than it was six months ago—which isn’t far off the 37.1 per cent recorded during the onset of the pandemic (April 2020).

The Bank of Canada may need to raise interest further. The rate at which inflation is decelerating has slowed. If the Bank decides to pause on interest rates, then inflation could become sticky. There are already signs that this is happening in Canada—on a seasonally adjusted monthly basis, the consumer price index rose 0.3 per cent in January (mainly driven by rising food costs), which is one reason why consumer confidence declined. However, it is not all dark and gloomy, households trust that the Bank will successfully curb inflation. Of those surveyed, only 28.3 per cent believed that prices would increase at an annual rate of 5 per cent or more over the next year—a drop of 1.7 percentage points from January. Inflation expectations have been trending down in recent months, which bodes well for consumer confidence in the near-term.