Canadian businesses’ profits likely give them a “cushion” to absorb more inflation cost increases without passing those hikes onto consumers, a new CIBC report suggests.
The CIBC Capital Markets report notes the Bank of Canada recently reported inflation could stay above three per cent in 2027, leading companies to push costs onto consumers. But the report says doing that for a longer period of time could prove challenging.
“In the kind of economy we have now, which is soft, labour incomes not growing quickly, and profit margins pretty wide by historic standards, we’ll probably see more of those cost increases absorbed by businesses and less of an inflation threat for prices other than energy,” said Avery Shenfeld, one of the report’s co-authors and CIBC chief economist.
Canada’s inflation rate was last measured at 3.1 per cent in September.
The report says many wholesale and retail companies’ operating profit margins are higher than in the past.
Retail profit margins are above the average they were a decade ago, the report shows.
Wholesale trade price index is at about 7.3 per cent year over year and consumer goods entering from abroad sit at about 8.9 per cent.
Shenfeld told Global News that the state of the economy is different from three to five years ago, such as when Russia invaded Ukraine resulting in a big spike in oil and grain prices. But with a lower unemployment rate in 2022 at 5.5 per cent and wage increases, more customers were willing to pay those increased costs.
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“There was a lot of spending power in the economy that had actually already escalated inflation,” he said. “If you go back to some prior episodes where the economy was softer and there were more unemployed people and wages were not growing in pace with prices, price increases didn’t stick as easily.”
The economy in 2011 was more similar to where Canada currently sits, the report says, citing supply disruptions from the Arab Spring. Unemployment at the time sat between seven and 7.6 per cent.
Unemployment was at about 6.7 per cent in October 2026.
Shenfeld said while businesses will often try to pass on cost increases to avoid changing their own margins, now isn’t the right time.
“I wouldn’t be surprsied to see some price increases coming, but whether they’re successful in retaining enough customers to sustain those prices, that’s really the question mark,” Shenfeld said. “Businesses will really have to see how consumers react and whether they have the buying power to pay more, not only for gasoline, but everything else they’re shopping for.”
Two weeks ago, the Bank of Canada hiked interest rates by 0.2 per cent to 2.5 per cent, the first change in a year and first increase in three years.
Governor Tiff Macklem cited the need to get inflation down and prevent higher energy prices, spurred by the Iran war and other geopolitical conflicts, from spreading to other goods and services.
He told MPs during a parliamentary committee meeting last week that businesses have “mostly absorbed” higher input costs so far, but past experience and Bank surveys suggest those costs will pass through to consumers next year.
That is possible, Shenfeld said, but it depends if inflation continues to rise. The report suggests a slacking labour market and moderate income growth will lead to inflation remaining weaker than the Bank of Canada expects.
“The Bank of Canada’s 3% core inflation forecast is driven off a very sizeable acceleration in core goods prices, one that would be more akin to what we would expect in a hotter economy than what we are facing right now,” the report says.
Should there be a resolution in the Middle East and oil prices continue to drop, inflation likely won’t take off to the level the Bank suggests. But Shenfeld cautions, if energy prices do rise, there will be more of an “inflation problem” and more rate hikes could occur.
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