Canadian firms see higher inflation with economy hitting limits

Canadian businesses reported widespread challenges with supply chains, labor shortages and their ability to meet strong demand in a Bank of Canada survey that will stoke worries about inflation and fuel expectations of a rate hike as early as next week.

Canadian businesses reported widespread challenges with supply chains, labor shortages and their ability to meet strong demand in a Bank of Canada survey that will stoke worries about inflation and fuel expectations of a rate hike as early as next week.

The central bank’s quarterly survey of executives paints a picture of an economy pressed up against its limits. Over two-thirds of respondents expect annual consumer price gains to surpass 3 per cent over the next two years. Almost 80 per cent say worker shortages are intensifying and their companies would have at least some difficulty meeting unexpected demand.

The capacity constraints are coming up against strong demand. More than two-thirds say indicators of future sales are improving, 62 per cent anticipate they’ll increase investment in machinery and equipment over the next year and 80 per cent plan to grow employment levels and wages. 

The report adds to evidence that economic conditions were strong in the final weeks of 2021, before the omicron variant prompted fresh lockdowns. 

Rising wage and inflation expectations will only cement investor bets that interest rates are poised to increase very soon. Markets are pricing in six Bank of Canada rate hikes this year, with a 70 per cent chance of an increase Jan. 26, when policy makers led by Governor Tiff Macklem announce their first decision of the year.