Businesses and consumers expect inflation to remain elevated in the near-term, as the breakdown in Canada-United States trade negotiations and the conflict in the Middle East continue to put upward pressure on prices and costs. According to the Bank of Canada ‘s new quarterly Business Outlook Survey (BOS) published on Monday, many business leaders expect Canada’s overall inflation rate to remain above three per cent over the next two years. Roughly half of firms surveyed said they planned to pass on some or all of their cost increases related to the Iran war and tariffs. Firms that have already passed some of the earlier cost increases planned to continue passing on past increases to customers over the next 12 months. Businesses also expected their non-labour production costs and selling prices to moderate but remain elevated over the next 12 months. Canada’s overall inflation rate ticked higher to 3.1 per cent year over year in September from three per cent in August, mainly due to higher energy prices caused by the Iran and Russia-Ukraine wars. “These pricing plans reflect some improvements in demand as well as firms’ desire to recover margins compressed by earlier cost increases. However, several firms, more than in the previous quarter, also reported that competitive pressures continue to limit their ability to increase prices,” the BOS read. However, central bank officials noted that many of the BOS responses were collected before trade talks broke down with the U.S. on Aug. 22. Many firms’ outlooks have deteriorated and inflation expectations have increased since then, but they don’t expect them to return to levels seen at the onset of the trade conflict in March 2025 and the peak in global oil prices in April. Nevertheless, the Bank of Canada said sentiment and expectations remain “considerably stronger” than at the height of trade tensions last year, which suggests a moderation rather than a fundamental shift in firms’ outlooks. Special consultations conducted in July and August also suggest that firms were adapting to trade tensions by modifying supply chains, increasing spending on technology like artificial intelligence and automation, and looking for new opportunities by diversifying their export markets. Many firms also reported plans to invest in digital technologies — including artificial intelligence, machinery and automation systems — to improve productivity and efficiencies. However, uncertainty around U.S. trade policy continues to restrain firms’ capital spending plans even if trade tensions were weighing less on near-term sales, and employment intentions remain soft below their historical average. “Most firms anticipate keeping staffing levels unchanged, often commenting that current levels are sufficient to meet expected demand … Several firms also expect automation and other efficiency improvements to raise productivity, allowing them to meet increases in sales without adding workers,” the BOS said. Meanwhile, higher fuel prices and tariffs are also putting upward pressure on spending for Canadian households. According to the new quarterly Canadian Survey of Consumer Expectations (CSCE), which was also published on Monday, the median value suggests many of those surveyed expected inflation to edge up to 4.03 per cent over the next year and 3.88 per cent in the next two years. Long-term expectations (3.91 per cent) also moved higher this quarter and are now in line with current perceptions of inflation (3.9 per cent). Respondents continued to cite tariffs and trade tensions as the top factor affecting inflation. Consumers who responded to the survey after the Canada-U.S. talks broke down reported slightly higher inflation expectations at all horizons, and many respondents described how tariffs were raising prices of everyday purchases in follow-up interviews. Energy prices were also widely cited as a source of inflation, even though the CSCE said fewer respondents mentioned them in the third quarter of 2026 than the previous quarter. Most believe the Iran war will raise inflation over the next 12 months, and several respondents expressed concerns about higher gasoline prices spilling over to other goods and services. “Consumer spending intentions edged down in the third quarter of 2026 and remain below the survey average. High prices of goods and services remain the top barrier to consumer spending,” the CSCE said. “Spending intentions continue to be weaker among households that expect the war in the Middle East to significantly raise inflation than among other households.” Monday’s BOS and CSCE are two key reports that the Bank of Canada’s governing council uses as part of their deliberations about the key interest rate. The central bank is scheduled to make an interest rate announcement on Oct. 28, along with the publication of a new quarterly Monetary Policy Report. Canada’s inflation rate rises above 3% on higher energy pricesInflation risks are rising as oil shock lingers, Macklem says • Email: ptran@postmedia.com
Businesses expect inflation rate to remain above 3% over next two years, survey says
