Small businesses are planning for record-setting price hikes

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Small businesses in Canada are planning hefty price hikes in the coming months as they grapple with supply chain disruptions, yet another sign of inflationary pressure as consumer prices climb at the highest rates in nearly two decades.

Over the next year, small- and mid-sized companies expect to raise prices by an average of 3.9 per cent, according to survey results published on Thursday by the Canadian Federation of Independent Business. That is the highest since data collection began in 2009.

Pricing plans varied by company. However, the most common response (from 27 per cent of businesses) was that they expect to raise prices by 6 per cent or more. The next most common response (from 19 per cent of businesses) was price hikes of 5 per cent over the next 12 months.

The path of inflation is perhaps the most hotly debated topic in economics. Canada’s consumer price index rose 4.4 per cent in September, the quickest annual increase since 2003. The U.S. inflation rate has exceeded 5 per cent for four consecutive months, the first time that has happened since 1991.

The CFIB results are just the latest sign that businesses and consumers expect higher inflation to persist for a while longer. That’s a notable development, because expectations can drive prices higher. For instance, if costs are expected to rise, companies may respond by setting prices higher or employees may negotiate better wages. In that sense, higher inflation becomes a self-fulfilling prophecy.

Soaring inflation, recovering job market raise pressure on Bank of Canada to hike interest rates

At what point is higher inflation no longer ‘transitory’?

As lofty inflation drags on, the situation is piling pressure on the Bank of Canada, which uses its monetary policy to maintain stable price increases, targeting an inflation rate of 2 per cent. Governor Tiff Macklem recently acknowledged that higher inflation is proving more persistent than the central bank initially thought it would. Alongside its rate decision on Wednesday, the Bank of Canada issued new forecasts for inflation, projecting the annual rate will rise toward 5 per cent later this year. Still, it expects inflation will fall to around 2 per cent by the end of 2022 as pandemic-related factors subside, such as the logjam of goods at global ports.

“The bottom line is Canadians can have confidence that inflation will come back to target,” Mr. Macklem said at a news conference.

The supply issues are having a tangible impact on small companies. In the CFIB survey, conducted earlier this month with 841 companies, 31 per cent of respondents said a shortage of products and materials was limiting their ability to increase sales or production. Before the COVID-19 pandemic, that number was usually in the low single digits. A record share (36 per cent) of companies said unfilled orders from their suppliers were higher than usual.

More so than supply issues, small businesses said labour shortages were the biggest factor holding them back. They expect to raise wages by an average of 2.5 per cent over the next year – a much stronger rate of increase than earlier in the pandemic. But their outlook for wages is exceeded by planned price hikes.

Despite talk of labour shortages, wage growth has been fairly subdued as the economy reopens, although there are tentative signs of an acceleration in the pace of wage increases.

On Wednesday, Mr. Macklem said the central bank was closely watching inflation expectations and wage growth for signs that higher prices are feeding into broader and more long-lasting inflation.

“So far, we’re not seeing that. But if we do see that, we will certainly take action and adjust our monetary policy stance further,” he said.

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