Bank of Canada surveys showed inflation expectations moving higher, with more evidence that firms plan to pass on higher input costs to customers. Although most survey results were collected before trade talks between the US and Canada collapsed at the end of August, the bank said "overall business sentiment improved" and sales outlooks strengthened in the third quarter. The bank's outlook indicator rose slightly to minus 0.33.
At the same time, the bank said results gathered since the re-escalation in trade tensions suggest the new tariffs are "weighing on firms' outlooks." "Inflation expectations have risen alongside the new tariffs and the recent rebound in energy prices," the bank said Monday. The business pulse survey, conducted into September, showed a spike in firms' inflation expectations for one and two years ahead. Almost a quarter of firms said it was too hard to say when inflation would return to the bank's 2% target. More than 40% of firms facing larger-than-normal cost increases plan to pass those costs on to customers over the next twelve months, and about a quarter say they have already done so.
The bank's consumer survey also showed Canadians expect higher longer-term inflation, a worrying sign for policymakers. Consumers' five-year inflation expectations spiked to 3.91%, the highest since the second quarter of 2022. Consumers felt better about their financial health, but their spending plans deteriorated further as high prices and economic uncertainty continue to weigh on them.
Earlier Monday, Statistics Canada reported that headline inflation rose to a 3.1% yearly pace, while yearly core measures eased. The Bank of Canada sets interest rates on Oct. 28, and traders in overnight swaps were pricing about a two-thirds chance of a hike at that meeting.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing