Bank of Canada says inflation expectations easing as businesses hold off passing on tariff price hikes

Yahoo

5 days ago

Short-term inflation expectations for Canadian firms eased during the second quarter, as slower demand offsets cost pressures caused by tariffs, according to the Bank of Canada surveys released on Monday.
Firms' expectations for the annual inflation rate fell to just under three per cent in June, compared to 3.7 per cent in April.
Still, 34 per cent of businesses expect their input prices to increase at a greater rate than the past year, while 25 per cent expect prices to increase at a lesser rate.
Despite these rising costs, businesses do not expect their prices to increase at a faster rate, with selling prices expected to rise at a similar rate as in the last 12 months.
'Tariff-related cost increases are also putting upward pressure on firms' expected selling prices,' said the report. 'But competitive pressures and the current weakness in demand are limiting firms' ability to pass on these costs to consumers.'
The majority of firms are absorbing tariff-related costs by reducing their margins and finding efficiencies, in an effort to preserve market share.
The slower demand is driven by consumers putting off large purchases and cutting back on spending, with the consumer spending index falling for a second consecutive quarter. The three main reasons for this cutback in spending include economic uncertainty, elevated housing costs and high prices for many goods and services.
The potential pass-through of tariff-related costs from businesses to consumers has been a particular focus for the Bank of Canada, which continues to monitor how inflation expectations are evolving in the Canadian economy. Core inflation has hovered around three per cent since April and was a factor in its decision to hold the policy rate at 2.75 per cent in June. Bank of Canada governor Tiff Macklem said in a speech last month that consumer prices will rise, unless tariffs are removed.
Bank of Montreal senior economist Shelly Kaushik said this latest round of surveys does nothing to change market expectations that the central bank will hold its policy rate at its next decision on July 30.
'Tariffs continue to hang over business and consumer sentiment, even if uncertainty dissipated through the latter half of the second quarter,' she said in a note to clients. 'Altogether, there's not much here to push the Bank of Canada off the sidelines at next week's meeting.'
Bank of Montreal senior economist Shelly Kaushik said this latest round of surveys does nothing to change market expectations that the central bank will hold its policy rate at its next decision on July 30.
'Tariffs continue to hang over business and consumer sentiment, even if uncertainty dissipated through the latter half of the second quarter,' she said, in a note to clients. 'Altogether, there's not much here to push the Bank of Canada off the sidelines at next week's meeting.'
Inflation expectations for Canadian consumers, meanwhile, remain elevated, with consumers expecting the annual inflation rate to be over four per cent over the next year. In particular, Canadians expect large increases in motor vehicle prices over the next 12 months. These expectations are as high as after the COVID-19 pandemic when the industry faced major supply disruptions.
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In the survey, businesses said they would only conduct layoffs if they experienced a sharp and prolonged decline in sales, but even then, layoffs are viewed 'as the last resort.' The majority of firms plan to keep their employment levels steady, while hiring intentions remain subdued as fewer firms than usual plan to increase their labour force. The unemployment rate in June declined for the first time since January to 6.9 per cent from its peak of seven per cent in May.
Business investment remains focused on routine maintenance and maintaining existing capital, instead of boosting productive capacity. Fewer firms than last quarter expect tariffs to negatively impact their investment plans.
The number of firms preparing for a recession has declined from 32 per cent to 28 per cent, but still remains above 2024 levels. Meanwhile, two-thirds of consumers expect the Canadian economy to fall into a recession this year.
In April, Canada's GDP contracted by 0.1 per cent, after first-quarter growth came in above expectations due to a surge in exports ahead of tariff announcements.
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