Canadian businesses increasingly see inflation as less of a transitory issue. The Bank of Canada (BoC) recently published the results of the Business Outlook Survey for Q3 2021. The survey, which measures future expectations for business activity, showed big inflation concerns. The share of businesses forecasting high inflation has never been this close to the share of businesses that think the BoC has it under control.
A Record Share of Canadian Businesses Expect Elevated Inflation
A record number of Canadian businesses are expecting higher than usual inflation. The survey found 45% of respondents in Q3 2021 expect inflation to rise above 3% for the next two years. Last year, that share was just 11% of businesses.
For context, the central bank has a target rate of 2% growth. These businesses see inflation at least 50% higher than ideal. Business expectations are important, setting the psychological environment to accept higher rates. When they accept higher costs, they have to pass them down to consumers.
The Share of Businesses That See Inflation Out of Control and Under Control Has Never Been This Close
The BoC also has a target range, which is an acceptable range for inflation to rise or fall. This range is between 1% and 3%, and the survey breaks it into two demographics. They found 42% of businesses in Q3 2021 are forecasting between 2% and 3% inflation. Another 10% of people see between 1% and 2% inflation, so 52% have forecasts within the target range. It’s the majority, but a narrow majority.
The share of people in the target range is now much lower than usual. “That share is now as close as it has ever been to the share of respondents expecting control-range (1%-to-3%) inflation, with 52% now in the latter group,” said Robert Kavcic, a senior economist with BMO. The share of businesses forecasting within the target range was 90% pre-pandemic.
Few Canadian Businesses See Low Inflation or Deflation
There were a couple of positive notes in the BoC survey, including no businesses expecting low inflation. Not even a single point of respondents in Q3 2021 is forecasting less than 1% inflation. There was brief panic in Q2 2020, when the share had reached 11% of businesses. It was the highest share of businesses since the Great Recession. Those fears quickly turned into excess inflation, after central banks printed everything they could to prevent prices from falling.
The survey shows most businesses attribute the escalated inflation to demand-side pressures. Along with high inflation, there were record hiring intentions and M&E forecasts. Sales were also forecast to be near a record high, just falling short. “This, by the way, is a lot of demand-side strength (even as the focus remains on transitory supply-side constraints).” said Kavcic.
More bluntly put, the bank is suggesting demand-side pressures are appearing. Most of the concern has been on supply bottlenecks, failing to reach record supply levels. These demand pressures can drive the BoC to hike the overnight rate sooner than expected. An issue the BMO economist only hinted at by saying, “earlier rate-hike chatter continues…”
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