Canada’s inflation concerns may be overstated, according to CIBC Capital Markets. The firm argues that retailers and wholesalers are likely to absorb rising business costs rather than pass them on to consumers. Economists Avery Shenfeld and Helen Lao point to lingering labour market weakness, modest income growth, and elevated profit margins as factors that could limit price increases. This could keep inflation lower than the Bank of Canada’s current projections, potentially reducing the need for further interest rate hikes.
The Bank of Canada’s October Monetary Policy Report forecasted inflation above 3% through much of 2027, up from its July projection. This revision was driven by expectations that rising producer and imported goods costs would eventually impact consumer prices. However, CIBC contends that businesses may struggle to pass on these costs due to consumer price sensitivity and existing profit margins.
Upstream inflation pressures have intensified, with Canada’s industrial product price index rising 14.5% over the past year, wholesale trade prices up 7.3%, and imported consumer goods climbing 8.9%. Despite these increases, retailers’ operating profit margins remain above pre-pandemic levels, and wholesale margins have room to absorb higher costs. CIBC compares today’s economic conditions to 2011, when elevated costs did not translate into broader inflation due to weak demand and competitive pressures.
The key test ahead will be whether higher upstream costs lead to sustained increases in core goods prices. Consumer inflation excluding gasoline currently stands at 2.2%, close to the Bank of Canada’s 2% target. CIBC expects core inflation excluding food and energy to move above target, but a gradual easing in gasoline prices could help contain overall inflation. The incoming data will determine whether further interest rate increases are warranted.