You’re not alone if you aren’t buying the “inflation is transitory” narrative. BMO Capital Market senior economist Robert Kavcic unpacked price change sentiment data. Small business owners see the cost of goods rising a lot over the next year. In fact, prices are expected to rise the most in at least a decade, by a wide margin. It also just so happens this sentiment data has a solid correlation with what you’ll pay later.
Businesses Are Being Squeezed On Margins
The reopening of the economy all of a sudden is causing a large squeeze. Small businesses are facing a perfect storm of higher input costs, and a labor shortage. Reduced industrial capacity and stimulus-driven demand are driving costs higher. Now a labor shortage is adding more expense, as businesses compete in a re-hiring boom.
These costs need to either be absorbed, or prices need to rise to accommodate them. Since small firms already struggle to compete by price alone, they’re forced to pass the costs on. And they foresee they’ll have to pass on some pretty hefty ones it would appear.
Businesses Expect The Biggest Price Hike Ever
BMO notes the expectation of price growth reached the highest level on record. On average, prices are forecast to rise almost 5% over the next year. Nothing even comes close to that kind of gain in over a decade of data. “In fact, more than a third of firms are looking at price increases in excess of 6%,” said Kavcic.
Business Sentiment On Price Growth Has A Solid Correlation
These aren’t just the rants of random fools on inflation. These are people close to the cost of goods before consumers get them. When they see costs rising, it usually trickles down to end consumers.
“Importantly, there is a solid correlation between what businesses say, and what they actually do,” he said. Adding, “Note that the Bank of Canada’s CPI common-component measure correlates well, with a 12-month lag. It’s clear where the near-term inflation risks still reside…”
So inflation is transitory… but probably not.
Like this post? Like us on Facebook for the next one in your feed.