Most Firms Expect Inflation to Stay Above 3% for Next Two Years: Bank of Canada Survey

Labour shortage and supply chain challenges expected to drive prices higher, survey shows

The Bank of Canada is shown in Ottawa on April 24, 2019. (The Canadian Press/Sean Kilpatrick)

More than two-thirds of Canadian firms are expecting inflation to stay above 3 percent over the next two years, according to a new survey from the Bank of Canada.

Released on April 4, the online survey conducted between March 4 and March 10 asked 152 firms about their expectations for the country’s inflation rate in the coming years.

The majority of businesses (70 percent) said they expect the average inflation rate to be well above 3 percent, while 26 percent thought the rate will stay around 2 to 3 percent.

On March 16, Statistics Canada reported that the consumer price index (CPI), a key inflation gauge that measures changes in how much Canadians are paying for goods and services, jumped again in February, rising 5.7 percent compared to February 2021—the largest gain since 1991.

“February marked the second consecutive month where headline inflation exceeded 5%,” the agency said.

Firms surveyed said ongoing supply chain issues, labour costs, and commodity prices—including prices related to energy, building materials, and food—were major factors leading to their conclusions on inflation.

Roughly half the firms surveyed also expect Russia’s invasion of Ukraine to impact their operations, mainly through higher costs for commodities and supply chain disruptions.

The survey noted that for firms that depend on goods imported from Europe or Asia, the challenges experienced in the supply chain will likely drive their input costs higher.

“They anticipate rising transportation costs and longer delivery times, beyond those related to the COVID-19 pandemic,” the central bank said. “Other businesses expect delays and reduced availability of commodities.”

The bank noted that the war’s ripple effects will not only impact businesses but consumers as well.

“Many firms plan to pass conflict-related cost increases on to their customers,” the survey said.

A “record high” number of businesses surveyed also said they are facing capacity issues, particularly in relation to labour shortages and supply chain challenges.

Four out of five reported that they would have some (51 percent) or significant difficulty (30 percent) in meeting an unexpected increase in demand.

“Because of persistent capacity pressures and strong demand, firms expect significant growth in wages, input prices, and output prices. Plans to increase investment spending and add staff continue to be widespread,” the survey said.

The respondents said their labour shortages are mainly due to structural changes and shifting occupational preferences, the current strong demand for labour, and pandemic-related factors, among several reasons.