Canadian businesses are grappling with labor shortages and supply chain disruptions, with plans to raise wages and increase costs to customers, according to the Bank of Canada’s quarterly survey of businesses.
This dynamic is raising short-term inflation expectations. Nearly half of the survey’s respondents, published on Monday, now expect inflation to remain above 3 percent for the next two years, although many say they expect the factors driving inflation to be temporary. The central bank surveyed nearly 100 businesses between mid-August and mid-September.
A separate survey of consumers also found an increase in short-term expectations of inflation. The average inflation forecast a year from now stood at 3.72 per cent, the highest level since the start of the survey. Medium- and long-term inflation expectations are set fairly well around 3 per cent.
The survey pair descends in the middle of a heated debate about inflation and supply chain constraints. Inflation hit an 18-year high of 4.1 percent in August, and many analysts expect inflation to rise again when the September Consumer Price Index numbers are published on Wednesday. The increase in inflation is fueled by global supply chain disruptions, which are driving up shipping costs and commodity prices. Labor shortage is also putting upward pressure on wages.
A Bank of Canada Business Outlook survey found Canadian companies are optimistic about future sales growth, but they also face significant capacity constraints. Sixty-five percent of respondents said they would have “some difficulty” or “significant difficulty” in meeting the unexpected increase in demand.
The biggest problem is the shortage of labour. Although Canada’s unemployment rate remains at 6.9 percent, companies are having trouble attracting workers. More than a third of respondents to the business survey said labor shortages were limiting their ability to meet customer demands. In addition, 71 percent of respondents said the labor shortage was more acute than a year ago, while only 7 percent said they were less acute.
Companies pointed to a number of factors that could contribute to the tight labor market, including government income support, health concerns among workers, and demographic and technological changes that have led to persistent skill shortages.
“Firms also reported slightly higher retirement and quit rates among employees compared to pre-pandemic norms, suggesting that changes in worker preferences may affect labor availability. The increased quit rate is in line with many Canadians reporting their willingness to leave their jobs voluntarily,” the bank said.
This is feeding into the company’s plan to raise salaries. Fifty-seven percent of respondents said they expected labor costs to be higher next year than last year, while only 7 percent expected labor costs to be lower. The companies reported plans to pass the increased labor costs on to customers.
Employment intentions are at record highs, and companies are also planning to increase capital investment. More than half of the respondents said they intend to invest more in machinery and equipment next year than in the previous year.
Expectations about the job market improved in a central bank consumer survey conducted in the second half of August. Workers reported a greater likelihood of voluntarily quitting their jobs and less likely to lose their jobs. Also, workers’ expectations for wage increases remain muted, despite increased expectations about inflation.
“This suggests that high inflationary sentiments coupled with a tight labor market have not led to higher wage growth expectations for workers in their current jobs,” the bank said.
The two surveys will inform the Bank of Canada’s next rate decision on October 27. The central bank is widely expected to ease the pace of buying government bonds next week. It may also give revised guidance on when it can start raising interest rates. The bank’s current forward guidance is that it will not start raising rates until the second half of 2022 at the earliest.
The Bank is following a tough move to balance high inflation on the one hand and worse-than-expected GDP growth in recent quarters on the other. The bank’s governor, Tiff McCalem, said last week that he expected the factors driving inflation to be temporary, though he said supply chain constraints are more complex and more permanent than the bank’s.
CIBC senior economist Royce Mendes wrote in a note to clients after the publication, “Despite growing concerns about the supply chain and inflation, both businesses and consumers have seen the recent increase in prices as a temporary measure, similar to ours and the Bank of Canada.” have seen.” of bank surveys
“Furthermore, any further slowdown of expected growth was due to temporary supply chain constraints and delta variance. Consequently, despite increased near-term business and consumer inflation expectations, this report suggests that the Bank of Canada may continue to hold back against bullish pricing for rate hikes by relaxed markets,” Mr Mendes wrote.
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