Canadian Inflation Expectations Bolster Case For Supersize Rate Hike

• Consumer inflation expectations surged in Canada, hitting fresh highs in the short-term and up "significantly" over the long-term, according to a survey conducted by the Bank of Canada, bolstering calls for a very rare 75-basis point rate increase. 
• In a separate survey, the bank found businesses expect high inflation for longer, with firms eyeing survey-record wage increases over the next 12 months and many planning to pass rising costs onto customers. The surveys both reinforce calls for a 75-bps rate increase at the Bank of Canada's next decision on July 13. This would be the largest hike since August 1998, when the bank lifted rates by 100 bps to defend the currency. 
• Canada's inflation rate hit a near 40-year high at 7.7% in May and prices are set to go higher before easing later this year. The bank has signaled it is willing to act aggressively to keep price increases from becoming entrenched. What central banks dread is a situation in which price increases become self-fulfilling -- expectations for higher prices cause people to raise wage demands and accelerate purchases, driving further price increases. 
• In its Business Outlook Survey, the bank found firms see inflation above 3% on average over the next two years, with nearly a quarter expecting price increases "well above" the 2% target for three years or more. Firms also plan to raise wages to attract and retain workers, the bank said, with businesses now expecting wage increases of 5.8% on average over the next 12 months, up from 5.2% in the previous survey.

(Source: Reuters)