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

Canadian businesses may have the financial capacity to absorb rising inflation without passing the costs onto consumers, according to a new CIBC report. The report suggests that with soft economic conditions, low labour growth, and historically wide profit margins, businesses may be better equipped to handle cost increases.

Inflation in Canada currently sits at 3.1% as of September, and the report notes that many wholesale and retail companies have higher operating profit margins than in previous years. Retail profit margins are also above the average from ten years ago. The wholesale trade price index is at 7.3% year-over-year, and the price of consumer goods coming from abroad is at 8.9%.

CIBC analyst Avery Shenfeld argues that the current economic landscape differs from three to five years ago, when Russia's invasion of Ukraine caused a significant spike in oil and grain prices. He points out that, unlike those situations, businesses currently have a larger pool of spending power in the economy, which could help to offset some of the increased costs.

However, Shenfeld warns that while some price increases may occur, businesses need to determine if consumers have the purchasing power to pay for those higher prices. He cautions that businesses will have to gauge whether customers are willing to pay more for goods and services, not only for gasoline but for everything they buy.

The Bank of Canada recently raised interest rates by 0.2% to 2.5%, citing the need to curb inflation and prevent higher energy prices from spreading to other goods and services. Shenfeld believes that while businesses have absorbed higher input costs so far, it remains uncertain whether those costs will ultimately pass through to consumers next year, depending on whether inflation continues to rise.