Canadian businesses have ‘cushion’ to absorb costs, limit inflation: report

Résumé détaillé

The report suggests many wholesale and retailers have created a "cushion" with profit margins allowing them to absorb more cost before passing it to consumers.

Canadian businesses’ profits likely give them a “cushion” to absorb more inflation cost increases without passing those hikes onto consumers, a new CIBC report suggests.

The CIBC Capital Markets report notes the Bank of Canada recently reported inflation could stay above three per cent in 2027, leading companies to push costs onto consumers. But the report says doing that for a longer period of time could prove challenging.

“In the kind of economy we have now, which is soft, labour incomes not growing quickly, and profit margins pretty wide by historic standards, we’ll probably see more of those cost increases absorbed by businesses and less of an inflation threat for prices other than energy,” said Avery Shenfeld, one of the report’s co-authors and CIBC chief economist.

Canada’s inflation rate was last measured at 3.1 per cent in September.

The report says many wholesale and retail companies’ operating profit margins are higher than in the past.

Retail profit margins are above the average they were a decade ago, the report shows.

Wholesale trade price index is at about 7.3 per cent year over year and consumer goods entering from abroad sit at about 8.9 per cent.

Shenfeld told Global News that the state of the economy is different from three to five years ago, such as when Russia invaded Ukraine resulting in a big spike in oil and grain prices. But with a lower unemployment rate in 2022 at 5.5 per cent and wage increases, more customers were willing to pay those increased costs.

“There was a lot of spending power in the economy that had actually already escalated inflation,” he said. “If you go back to some prior episodes where the economy was softer and there were more unemployed people and wages were not growing in pace with prices, price increases didn’t stick as easily.”

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