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Canadian businesses are planning to hike prices at the highest rate in more than a decade as inflation, supply-chain disruptions and labour shortages weigh on companies.

Small and medium firms expect to raise prices by 3.9 per cent over the next 12 months, according to a survey released this week by the Canadian Federation of Independent Business. It is the highest bump in expectations since CFIB’s Business Barometer began publishing in 2009.

“Currently, input and labour shortages are key obstacles for firms as they have impeded their ability to restore sales and ramp up production,” Ksenia Bushmeneva, an economist at Toronto-Dominion Bank, wrote in a note Thursday. “Consumer demand remains healthy, but meeting it amid shipment delays and higher input costs is a challenge.”

The latest results play into a broader debate surrounding inflation, which has surged to its fastest pace since 2003 to 4.4 per cent, at a time when the economic recovery has hobbled along against expectations. Early estimates of gross domestic product in September show little change from lower-than-expected growth of just 0.4 per cent in August, Statistics Canada reported Friday. The uneven recovery has already proven tricky for the Bank of Canada as it deals with inflation surging past its mandated target of between one and three per cent.

On Wednesday, the central bank reduced its growth projections for the third quarter by about 1.75 per cent to 5.5 per cent and revised up its inflation expectations to hit 4.8 per cent towards the end of this year, when, previously, policy-makers expected prices to retreat to 3.5 per cent. This has caused the central bank to pull forward its guidance on interest rate hikes that could see it begin raising the overnight rate from near zero as early as April when previously it expected an increase sometime in the second half of the year.

At the heart of the surging prices is lagging and disrupted supply to meet burgeoning demand, pushing up the cost of raw materials and goods. Close to a third of survey respondents indicated a shortage of input products is weighing on production growth, the highest level ever in the Business Barometer’s history.

On top of that, the labour market, though it’s fully recovered its pre-pandemic losses, still has sore points . The unemployment rate is at 6.9 per cent, still above the pre-pandemic trend. Nearly half of the firms in the CFIB survey said a shortage of skilled labour is placing limitations on sales or production growth, while 40 per cent said it’s the same for unskilled labour. As a result of the shortage, respondents said they expect to raise wages 2.5 per cent.

Supply and labour shortages have been affecting the firms’ capacity utilization rate, which fell for the first time since May from 74.8 per cent to 73 per cent. Claire Fan, an economist at Royal Bank of Canada, cautioned reading “too much” into the drop as it’s not seasonally adjusted data. “But, capacity issues that are limiting supply will put a floor under price growth in the near-term,” Fan said.


Story by: Financial Post