Inflation expectations edge up, spending plans subdued

The Bank of Canada's latest survey reveals a slight uptick in inflation expectations across all horizons.

A larger share of consumers now anticipates inflation above 3 percent over the next 12 months, while two- and five-year-ahead expectations also edged up.

Tariffs and trade tensions remain the most frequently cited drivers of inflation, a persistent concern for businesses and consumers alike.

However, mentions of energy prices as an inflationary factor rose sharply in the second quarter.

Approximately 70 percent of consumers expect the ongoing war in the Middle East to contribute to higher inflation over the next year, primarily linking it to increased gasoline prices.

One respondent highlighted the direct impact: "Where I work, a lot of raw material is used.

... [Tariffs have raised] substantially the price of the item itself plus the cost to ship it, so we have to pass that cost on to our customers."

Consumer spending intentions edged down, with concerns about high prices and economic uncertainty continuing to dampen plans.

Households expecting the Middle East war to significantly raise inflation report weaker real spending expectations and are more likely to adjust habits, such as substituting cheaper essentials or reducing discretionary purchases.

Conversely, perceptions of the labour market improved modestly from previous lows, reflecting a decline in the perceived risk of job loss, particularly in trade-exposed sectors.

Despite this, the labour market is still viewed as soft due to broader economic uncertainty and concerns about artificial intelligence.