Businesses reluctant to raise consumer prices

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Tepid economic growth is hampering the ability of Canadian businesses to raise consumer prices despite higher raw material costs.

A new report from Bank of Montreal, scheduled to be released Thursday, shows 57 per cent of surveyed businesses plan to hold prices steady in 2012.

The main reason? Businesses are under growing pressure to remain competitive. In addition to worries about economic growth, companies are feeling pinched as bargain-hungry consumers scour for deals in Canada and the United States.

"Current modest economic and wage growth, and the lure of cross-border deals have convinced many Canadian businesses not to raise prices," says Sal Guatieri, a senior economist with BMO Nesbitt Burns Inc.

Businesses in Alberta, Manitoba, and Saskatchewan are most likely to keep their prices the same next year, the report said. Those in British Columbia, meanwhile, appear more poised to hike prices.

It remains to be seen how those pricing pressures will impact profits next year. Mr. Guatieri suggests it largely depends on the type of business.

"Raw material costs represent a modest share of overall costs for most businesses," he says. "The bulk is labour costs. If companies can hold labour costs in check, and raise productivity and cut other costs, then they can preserve profits despite steady selling prices.

"Conversely, a steel company, for example, could face shrinking profits if iron ore costs escalate."

Stable consumer prices, though, do point to tamer inflation. BMO is forecasting Canada's inflation rate to decrease from 2.9 per cent this year to 2.1 per cent in 2012. Overall, Canada's economic growth rate is expected to be 2 per cent next year.

While most businesses seem hesitant to raise consumer prices, they still appear eager to stay the course on their short-term investment plans. BMO's report found that 79 per cent of business owners plan to invest the same amount of money or more in their companies next year.

Among those who plan to devote more funds, the main spending priorities include upgrading or buying new equipment, hiring new staff and earmarking more money for employee training.

The report's results are based on a Leger Marketing survey of 509 small, medium and large business owners that was conducted between Aug. 30 and Sept. 16, 2011. It has a margin of error of plus or minus 4.4 per cent, 19 times out of 20.