By Paul Vieira
OTTAWA--The Middle East conflict has sharply lifted Canadian firms' inflation expectations, and triggered worries among executives about their inability to pass on higher costs to customers, according to a pair of Bank of Canada quarterly surveys.
Households, meanwhile, have already canceled holiday plans and postponed spending on big-ticket items due to worries the war in Iran will weaken the Canadian economy and lead to elevated price increases, the central bank survey suggested.
The bulk of the research for the quarterly Bank of Canada surveys gauging business and consumer sentiment was done in February. Central bank analysts conducted a set of interviews in March after the outbreak of war in Iran, which led to a surge in energy prices. Earlier Monday, Statistics Canada reported that gasoline prices in March rose just over 21%, or a record month-over-month increase.
Headline inflation in Canada accelerated in March to 2.4%, which was slightly below market expectations for a 2.6% gain. A gauge measuring the consumer-price index excluding gasoline decelerated in March to 2.2%, which signals underlying weakness in the Canadian economy.
Given the economic softness, Bank of Canada Gov. Tiff Macklem said last week the central bank is cognizant of the risk of raising interest rates prematurely to contain inflation stemming from the Middle East conflict, which has essentially shut down tanker traffic through the Strait of Hormuz. Macklem said officials need to balance that risk with concerns about waiting too long to raise rates.
"Most businesses had revised up their expectations for input prices, mentioning specifically fuel, freight, fertilizers and exchange rates," the central-bank survey said, based on interviews with 20 firms in March. Prior to March, inflation expectations were broadly steady among short- and longer-term horizons between 2.5% and 3%, based on interviews with about 100 firms. The 20 companies interviewed in March indicated headline inflation could reach 3.8% in a year from now, followed by 3.4% in two years and 3% in five years.
The Bank of Canada sets interest rates to reach and maintain 2% inflation, and it delivers its next rate decision on April 29. Generally, the bank relies on the survey's findings to feed into their quarterly forecast and rate-policy decisions.
Despite higher prices, companies also said they are worried about recouping higher costs through price increases, citing weak domestic demand, further strains on household budgets and elevated industry competition.
"Some of these firms anticipate - or are already experiencing - margin compression as they absorb part or all of the increase in their costs. Others emphasized that it is too early to determine how much to pass on to customers," the survey said.
An online survey of 600 Canadian households conducted in March indicated that more than 85% believe the economy would weaken further due to the fallout from the Middle East conflict. A similar share predict inflation would be higher. In response, the survey suggested that 21% of households have decided to cancel or postpone planned holiday travel, and 28% have postponed or reduced major spending plans.
Based on results from February, the Bank of Canada said hiring and investment intentions among companies had improved, and there was a renewed confidence among firms about navigating the choppy trade-policy waters.
"Fewer firms than last quarter reported that trade tensions are impacting their sales outlook, while more said public spending is supporting sales," the survey said. Most of Canada's U.S.-bound exports are exempt from tariffs due to provisions in the U.S.-Mexico-Canada trade treaty, known as USMCA. That treaty faces a U.S.-led review, which starts in earnest this summer, at which time the Trump administration could demand changes to keep the treaty in place -- such as permanent tariffs.
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
04-20-26 1158ET
