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Inflation expectations across the two quarterly BOC surveys were mixed in Q2 but generally pointed to stabilization from Q1.

• In the BOS, the share of firms predicting inflation of 2-3% in the next 2 years rose to 51% from 44% prior. But that was probably the most concerning result from the survey and in any case only reverted back to the Q4 2024 level. The percent seeing 3+% inflation was steady at 23% though that's well below the 70-80% amid the 2022 inflationary episode.
• Meanwhile in the CSCE, consumer expectations of price increases largely abated.
• Inflation is currently seen at 3.82% (a 15-quarter low), with 1Y expectations down 5bp to 4.04% and 2Y down 4bp to 3.85%.
• In the most worrying finding, 5Y out expectations ticked up 6bp to 3.45%,a 14-quarter high.
• But generally speaking these were little changed from the prior quarter's survey and should offer the BOC some confidence that inflation expectations aren't becoming de-anchored by the US-Canada tariff conflict.

The BOC's Canadian Survey of Consumer Expectations for Q2 meanwhile showed further deterioration in sentiment.

• The new report included a new summary index, the CSCE indicator, "a measure developed to summarize the opinions of Canadian consumers about their spending plans, the labour market and their personal finances. The CSCE indicator declined this quarter as spending intentions weakened further due to the persistent threats of tariffs and related uncertainty."
• The indicator declined for a second quarter, to -1.07 from -0.74 and -0.36 in the fourth quarter of last year.
• Individual component expectations were broadly weaker, including in:
  • spending ("more consumers planning to cut spending in response to their inflation expectations. These expectations are being driven by consumers’ belief that tariffs will put upward pressure on inflation")
  • the labour market ("remained nearly unchanged after falling sharply in the first quarter of 2025. Consumers, especially young people, continued to report a higher-than-average chance of losing their job. This elevated concern is largely because of the trade conflict with the United States.")
  • financial health ("growing pessimism").

The Bank of Canada's quarterly Business Outlook Survey (BOS) and Canadian Survey of Consumer Expectations (CSCE) showed broadly that the economy and inflation expectations stabilized between February (the Q1 survey) and May (the Q2 report released this month). 

• Neither survey's findings are an obstacle for further BOC rate cuts, but nor do they make a compelling case for further easing (although the consumer survey was clearly the weaker of the two).
• Additionally, there is something of a staleness about the Q2 survey, whose responses were collected before US Pres Trump raised his tariff threat to 35% while pushing back his deadline to Aug. 1. As such there was only limited market reaction to the Q2 release on July 21.
• In the BOS, the 0.3 point drop in the Business Outlook Indicator (-2.42) in Q2 brought the level to the lowest since Q4 2023 but was a stabilization of sorts compare to the 1 point drop between Q4 2024 and Q1 2025 (which was the largest since early 2023 albeit that was from a much higher starting level). Past and future sales dropped to the lowest level since Q1 2024, with indicators of future sales at -6, the lowest since Q4 2023.
• 28% of business owners expect a recession in the next 12 months.
• Even so, machinery investment intentions and future employment actually picked up slightly.
• From the report: "Tariffs and related uncertainty, along with spillover effects on the Canadian and global economies, continue to have major impacts on businesses’ outlooks. However, the worst-case scenarios that firms envisioned last quarter are now seen as less likely to occur. Sales outlooks remain pessimistic overall due to widespread concerns about the broader effects of a slowing economy. But recent monthly survey results suggest some improvement in firms’ outlooks—particularly among exporters—because few have been directly affected by the current tariffs. Uncertainty continues to drive cautiousness in outlooks for hiring and investment. Most firms expect to maintain current staffing levels and limit investment to regular maintenance over the next 12 months."