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Shoppers buying groceries at the Urban Fresh Produce stand at Toronto’s St. Lawrence Marke on May 18, 2022.Fred Lum/the Globe and Mail

Todd Hirsch is a Calgary-based economist, author and public speaker. He is also the director of the Energy Transition Centre and the former chief economist of ATB Financial.

At a recent speech I gave on the economy and inflation, a gentleman came up to me afterwards and said, “Do you really think inflation is falling? I don’t believe it for a second. They’re lying to us! Trudeau is telling Statistics Canada what to say!” The comment was troubling. He may not be representative of the general public; but he’s certainly not alone in his suspicion and distrust of official statistics.

One of the central objectives of the Bank of Canada is keeping inflation low, stable and predictable – and the mission to wrestle it back down to 2 per cent has been continuing for the past few years. Embedded in that mission is keeping consumers’ expectations of inflation anchored at 2 per cent.

But new data suggests that the anchor has shifted.

According to the most recent Canadian Survey of Consumer Expectations, a quarterly survey by the Bank of Canada, Canadians estimated inflation to be 5.9 per cent – nearly double the official rate. (The survey was conducted in the first half of November, 2023, when the official inflation rate was 3.1 per cent. In January, inflation was 2.9 per cent.)

The misalignment in perceptions is even more stark for young people. Canadians aged 18 to 24 believe current inflation to be 9.8 per cent, more than three times the official rate. When asked about the inflation rate a year from now, they expect it to be a stunning 11.5 per cent, and 9 per cent five years from now.

Perceptions of current inflation are a bit closer to the official rate by those aged 25 to 54 (6 per cent), and those 55 and over (5.1 per cent).

Businesses are more optimistic, but they still expect inflation to remain stubbornly high. In the most recent Business Outlook Survey, 54 per cent of businesses in Canada expect the consumer price index to remain above 3 per cent over the next two years. Nearly four in 10 others expect inflation in the range of 2 to 3 per cent. Almost none of them (3 per cent) expect inflation of 1 to 2 per cent.

The problem of inflation has become a staple in political language, another indication that the anchor has shifted. Every politician in opposition scores points with the phrases “runaway inflation,” “soaring cost of living” and “affordability crisis.” They’ve come to dominate the zeitgeist of an anxious generation. With a federal election still well over a year away, the political point-scoring will continue full throttle.

All of this adds up to a major headache for the Bank of Canada. If inflation expectations do not return to their 2-per-cent anchor soon, several potential problems loom.

First of all, consumers’ expectations of inflation drives behaviour. If shoppers of major durable products (for example, appliances or vehicles) expect that prices are going to rise at a faster rate than their income, they may make a decision to purchase that item today, rather than in the future. The same goes for businesses looking to make capital investments in machinery and equipment. This introduces what economists call a distortion – the choice of what and when to buy is altered by information which may not be correct. That results in suboptimal economic decisions.

The second reason why it’s important to anchor inflation expectations is to prevent an inflationary spiral. If workers believe inflation to be, say, 5 per cent, they’ll expect a 5-per-cent increase to their wages. With labour shortages still plaguing many industries, employers may have no choice but to comply. In turn, higher labour costs will be passed on to the price of goods and services – et voilà, a self-perpetuating inflation spiral.

Finally, if consumers believe inflation to be significantly higher than the official rate, it erodes their confidence and trust in public institutions such as Statistics Canada, the Bank of Canada and even the government itself. In a world already plagued with a lack of trust in official institutions and a rise in skepticism around “fake news,” even lower confidence in official data erodes our ability to have healthy citizen discourse on policy.

How long our inflation expectations remain unanchored is yet to be determined. But the fact that the most skewed expectations are among young people is not encouraging. These are the consumers, the home buyers and the voters of the future. And if they believe inflation is going to be 9 per cent five years from now, we have a problem.

The Bank of Canada is obviously aware of the situation. And that, no doubt, is adding to the urgency of getting inflation back down to 2 per cent. The sooner they’re able to return inflation to “low, stable and predictable”, the sooner consumers’ expectations will return to being anchored. But that may not happen for quite some time.

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