Inflation tops list of concerns for Canadian businesses in third quarter: survey

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A majority of Canadian companies put inflation on the top of their list of concerns for the remainder of the year, signalling the country’s year-long struggle with inflation is putting a strain on business owners.

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The Canadian Survey on Business Conditions, a quarterly poll of some 17,000 businesses conducted by the Canadian Chamber of Commerce and Statistics Canada, found that 60 per cent of respondents considered high inflation to be the biggest near-term challenge – the highest level of concern recorded since the survey began in the Spring of 2020.

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Headline inflation dipped for the second month in a row in August, as the consumer price index increased seven per cent from a year earlier compared with a year-over-year gain of 7.6 per cent in July following a peak of 8.1 per cent in June. Still, the most recent readings remain way too high for the Bank of Canada, which aims to keep inflation advancing at an annualized rate of about two per cent. The central bank has raised its benchmark interest rate by three percentage points since March, in part to keep bolster confidence that it’s serious about getting price increases under control.

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“Businesses are pretty much struggling with costs,” said Canadian Chamber of Commerce chief economist Stephen Tapp. “Running a business right now, it’s extremely expensive and it’s hard to do given lack of access to workers and input costs rising pretty considerably.”

The report noted a “glimmer of hope,” as 34 per cent of respondents said they would raise prices over the next quarter, down from 39 per cent in the previous survey. Still, Tapp said it was the first time he has seen the majority of businesses point to a single obstacle as being the most concerning heading into the next quarter.

Companies appear to be dreading inflation because it’s making it harder for them to maintain their profit margins. Executives cited rising input costs as their second-largest obstacle, with 47 per cent of respondent expressing worry, down from 50 per cent in the previous quarter. These cost pressures were particularly acute in agriculture, manufacturing, as well as accommodation and food services.

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In the latest inflation reading, Statistics Canada noted that weather events and supply chain challenges caused the price of food products to rise 10.8 per cent since last year in August, the fastest pace since 1981.

Businesses also have less wiggle room when it comes to taking on debt. At least 52 per cent of the surveyed businesses reported that they could not take on more debt or were not sure whether they could. This reading was unchanged from the last quarter and is a particular worry for smaller firms and high-contact services that have been hit harder during the pandemic.

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Ongoing labour challenges are also a cause for concern, with 36 per cent of businesses expecting to have trouble attracting the right talent. Construction, health care, retail, and accommodation and food services are sectors that are grappling with this problem the most.

The Bank of Canada’s policy rate is currently at 3.25 per cent, compared with 0.25 per cent at the start of the year, representing a bigger spike in borrowing costs in six months than occurred over the decade that separated the Great Recession and the start of the pandemic in early 2020. The central bank acknowledges that rising rates on top of high inflation is further straining households and businesses, but insists the hurt would be greater down the road if it lets inflation expectations take root.

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South of the border, the U.S. Federal Reserve is on a similar mission to ease the high pace of inflation with a series of aggressive rate hikes, including a 75-basis-point hike on Sept. 21 that brought the benchmark federal funds rate between three per cent to 3.25 per cent. It’s the highest rate since the since before the 2008 financial crisis, a measure policymakers deem necessary to reverse inflation that has accelerated to 8.3 per cent.

Fed officials expect to go even further, with the median projections of Fed officials signalling the benchmark rate could rise to above four per cent this year, and then above 4.5 per cent next year. Such a trajectory could push the Bank of Canada to make a similar moves, as a gap between Canadian and American interest rates likely would put downward pressure on the Canadian dollar, which would in turn keep upward pressure on inflation by making imports more expensive.

Rising rates could the brakes on economic growth, but Tapp said businesses appear to remain confident they can ride out the turbulence.

Further into 2023, “you do see companies are expecting modest positive growth,” Tapp said. “In general, businesses are still a pretty optimistic group. People that open up businesses certainly think that they’re going to do well and grow and thrive and all of those kinds of things.”

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