Will prices eventually fall in Canada? Why experts say deflation is unlikely – National | Globalnews.ca

What goes up does not necessarily come down.

This is contrary to the sentiment of a surprisingly large proportion of respondents. bank of canada The Quarterly Consumer Expectations Survey, released last week.

According to the survey, more than a quarter of Canadians believe current decades-high prices will drop five years from now.

In an interview after the survey one respondent said, “What goes up must come down”.

This sentiment raised the eyebrows of the central bank

“The likelihood of deflation in five years is extremely small,” said Stéphane Gordon, an economics professor at Laval University.

While some prices will come down, as has been the case with gasoline prices, Gordon said higher commodity prices feed into each other through the supply chain and become baked into the economy.

“It starts to feed into people’s expectations and it becomes a self-fulfilling prophecy,” he said.

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Meanwhile, the Bank of Canada said the confusion between deflation (falling prices) and deflation (slowing rise in prices) was not so widespread, noting that its survey respondents understood the difference.

The central bank regularly monitors inflation expectations in the economy to ensure that it has a handle on price increases. With inflation running well above its two per cent target, inflation expectations have been a top concern for the Bank of Canada.

If people and companies expect inflation to remain high in the future, that expectation may cause businesses to charge higher prices and workers to demand higher wages.

Generally, people expect deflation when the economy is not doing well. However, the Bank of Canada reported that respondents who said they forecast deflation were less likely than other Canadians to expect a recession over the next twelve months.

Instead, these respondents were more likely to believe that inflation was caused by supply chain disruptions. Once these temporary pressures on inflation subside, many of them believe that prices that have risen sharply will fall again.

Although James Orlando, TD director of economics, agrees that deflation is unlikely on the horizon, he said there is logic behind what these respondents are thinking.

“As supply chains are getting easier, and they’re shrinking very quickly right now, we’re going to start getting more and more rebates,” Orlando said.

Consumer Price Index data shows that prices of some items have already been falling in recent months.

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For example, prices of durable goods, which include products such as furniture, fell between November and December.

However, this does not mean that the economy will experience broad-based deflation, Orlando said.

“The reason why we don’t think that overall inflation is going to remain in negative territory…is because you have to consider that the economy is not just goods, it is services as well,” he said.

Prices for services are driven by wages, he said, which are unlikely to fall given their sticky nature.

While deflation may sound like good news at face value, Gordon said it is not something anyone should wish for.

“Businesses have to be in a really bad shape for companies to cut their prices. And if they’re in that shape, they’re probably cutting employees,” he said.

Similarly to high inflation, deflation will also raise alarm bells for the central bank. Orlando said Canada’s economic system expects there to be some inflation and has built in expectations. it is

If prices start to decline, the Bank of Canada will be forced to jump in and stabilize prices.

For now, the central bank’s worries are far from overshadowed by deflationary fears.

Canada’s annual inflation rate was 6.3 per cent in December, a noticeable improvement from the previous month but still too high for the Bank of Canada’s comfort.

Although some Canadians believe prices will correct on their own, the Bank of Canada isn’t counting on it as it prepares for another _ and potentially final_ interest rate hike on Wednesday.

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