Canada's second-quarter business-outlook survey found inflation expectations jumping to a level last seen in early 2023, driven by anticipated energy costs from the conflict in Iran. The Bank of Canada publishes the data nine days before its July 15 rate decision, though June responses already showed expectations cooling after the U.S.-Iran deal.
Firms in Canada expected sharply higher prices in the second quarter, with the share anticipating inflation above 3% over the next two years rising to 44% from 11% the previous quarter. The Bank of Canada's quarterly business-outlook survey tied the jump to anticipated energy costs from the conflict in Iran, according to the report published Monday.
Expectations at a two-year high
The survey showed expectations for higher prices — both what firms pay for inputs and what they charge customers — at a level last recorded in early 2023. Expectations for growth in non-labor input costs and selling prices over the next year also increased considerably, based on interviews conducted from May 1 to May 21.
But the timing matters. Most of the survey was gathered in May, before the U.S. and Iran struck a deal to let oil-tanker traffic resume through the Strait of Hormuz. Some June responses showed a notable cooling in expectations after the pact, and Governor Tiff Macklem said in late June that the truce removes some of the upside risk on inflation.
A stale reading?
Some economists had anticipated the results could arrive somewhat stale. A barrel of crude oil now trades in the $69 range, whereas in May it ranged from the high $80 level to nearly $110. BMO Capital Markets economist Shelly Kaushik noted before the release that expectations could be a look in the rearview mirror given where energy prices stand today.
The central bank targets 2% inflation, the midpoint of a 1% to 3% range. Inflation accelerated in May to a two-year high of 3.2%, though Macklem said there was limited evidence of higher energy prices spreading to other goods and services.
Rates likely to hold
The Bank of Canada has kept its main interest rate steady at 2.25% since the fall of last year, and most economists expect no change through 2026. Officials said in their latest minutes that they did not want to overreact to the jump in energy prices, but also did not want to be slow to react to any spillover that might accelerate a pickup in inflation.
Source: MarketScreener
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