Price hikes won’t be as steep in year ahead, some firms tell Bank of Canada

A pair of surveys released from the Bank of Canada on Monday show many firms’ price plans are “slowly returning to normal” after a period of elevated inflation, thanks in part to a slowdown in consumer spending and easing in the labour market.

The central bank’s quarterly Business Outlook Survey shows that firms are expecting the size and frequency of their price changes to “moderate” in the next 12 months. Those surveyed pointed to weaker demand and more competition over the past year as putting “downward pressure” on price growth.

Some businesses did indicate that they’ll continue to pass on bigger and more regular price hikes to their customers. These firms said they’re dealing with high wage costs and are facing higher input prices themselves, or are trying to boost profit margins that faltered over the past few years.

For the rest who are cooling their price hike plans, they intend to curb costs elsewhere by slowing hiring or seek to grow their revenues in other ways.

That could be tough heading into 2024, as the survey shows the outlook for future business is deteriorating on aggregate.

Three-quarters of businesses say they’re feeling the pinch of higher interest rates, and are less likely to hire or make new investments amid expectations for declining sales this year.

Other firms, particularly those in industries like retail, food, and accommodation and housing, say they are struggling with a lack of access to credit.

High interest rates and inflation have pushed more consumers to trim their spending habits in the latest quarter, according to the survey.

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The Bank of Canada said that the consumer survey shows “financial pressure remains high, particularly for households living paycheque to paycheque.”

But the central bank also noted that, by and large, homeowners with mortgages “remain confident” they can make their payments even as their mortgage terms come up for renewal.

Expectations for inflation, both in the business outlook and in the Bank of Canada’s counterpart consumer survey, showed some signs of easing in the fourth quarter. The central bank watches inflation expectations as one of the metrics it uses to guide future interest rate decisions.

While businesses said they expect inflation to trend lower in the short term, firms overall expect inflation to remain elevated over the next four years.

On the consumer side, the Bank of Canada said stickiness in price growth on rent and other services could be keeping inflation expectations from falling.

TD Bank economist Maria Solovieva said that a gap between consumers’ expectations for inflation and actual price changes sets up a problem for the central bank. She argued in a note Monday that the Bank of Canada ought to shift its communications strategy to point out that shelter prices are not necessarily a determinant of “wider inflation patterns.”

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Failing to do so could force the Bank to keep rates higher for longer to get expectations back in line, Solovieva said, risking a steeper economic downturn that otherwise needs.

CIBC senior economist Andrew Grantham said in a note to clients Monday morning that the signs of “normalization” in inflation expectations and firms’ pricing behaviours should be good news for the Bank of Canada heading into its first interest rate decision of the year next week.

“Overall, the report should make the Bank of Canada feel a little better that inflationary pressures and expectations are normalizing, albeit not by quite enough yet to bring an early interest rate cut,” he said.

Before making its interest rate decision on Jan. 24, the Bank of Canada will get a look at inflation data for December on Tuesday. Economists at the Bank of Montreal expect inflation accelerated to 3.5 per cent in the month.

A scarcity of talent, once a predominant concern for firms in the Bank of Canada’s business outlook, is no longer a top issue worrying firms amid signs that labour shortfalls have eased, the surveys show.

Labour shortages are close to their historical averages in the business survey, with firms reporting less competition for talent. Some employers pointed to a boost from recent immigration helping to fill labour gaps.

For those still dealing with a labour shortfall, the central bank said “longer-term structural issues” were at play, including a wave of retirements among highly experienced workers and strong demand for skilled workers like those in the trades.

Nearly half of firms said in the surveys that the plan to maintain the size of their payroll this year, but are not planning to add new roles and would only hire to replace outgoing talent. A rising share of firms are meanwhile planning to reduce the size of their workforce.

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Canada’s unemployment rate has risen to 5.8 per cent, up 0.8 percentage points over the course of 2023, thanks largely to a slowing pace of hiring failing to keep pace with population growth. Wage growth has remained hot, with the latest labour force survey showing average hourly wages rose 5.4 per cent year-over-year.

But with firms reporting fewer labour issues heading into 2024, the surveys also suggest there will be less pressure on wage growth in the year to come.

Overall, wages are expected to rise an average of 4.1 per cent in the next 12 months, above the 3.2 per cent historical average. Firms indicated they’d be raising wages to compensate for the higher cost of living over recent years, and the Bank of Canada added that union negotiations are also pushing pay higher.

While the consumer survey showed that Canadians are still making adjustments to cope with higher prices, the push to offset the rising cost of living with pay hikes might be “dissipating.”