Canadian businesses have room to absorb inflation costs, CIBC report says

A new report from CIBC Capital Markets argues that Canadian companies have the financial capacity to absorb higher costs without necessarily raising prices for consumers. The analysis points to operating profit margins for many wholesale and retail businesses that are currently above historical averages. This provides a cushion as the Bank of Canada warns inflation could persist above three per cent for years. The report's authors suggest that trying to pass costs onto consumers for an extended period may prove difficult in the current economic climate. CIBC chief economist Avery Shenfeld, a co-author of the report, said the soft economy and modest wage growth make widespread price hikes less likely. "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," Shenfeld said. He contrasted the present situation with the period following Russia's invasion of Ukraine, when strong consumer spending power allowed businesses to pass on significant cost increases.

The report indicates that a weaker labour market and slower income growth should keep inflation below the central bank's projections. Shenfeld noted that businesses typically aim to protect their margins by raising prices, but consumer resistance may limit their success now. He said the critical issue is whether customers have enough purchasing power to accept higher prices for gasoline and other goods. The current unemployment rate, measured at 6.7 per cent in October 2026, is higher than the 5.5 per cent seen in 2022 when wage growth was stronger.

Recent data shows the annual inflation rate was 3.1 per cent in September. Input costs remain raised, with the wholesale trade price index up 7.3 per cent year-over-year and imported consumer goods rising about 8.9 per cent. The report draws a parallel to 2011, when supply disruptions from the Arab Spring occurred amid unemployment between seven and 7.6 per cent. Retail profit margins today are wider than the average seen a decade ago, according to the CIBC analysis.

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Bank of Canada Governor Tiff Macklem recently told a parliamentary committee that firms have "mostly absorbed" higher input costs so far. However, he said historical patterns and bank surveys indicate those costs will likely be passed to consumers next year. The CIBC report disputes the likelihood of a major acceleration in core goods prices, calling the Bank of Canada's three per cent core inflation forecast more typical of a hotter economy. "The Bank of Canada's 3% core inflation forecast is driven off a very sizeable acceleration in core goods prices, one that would be more akin to what we would expect in a hotter economy than what we are facing right now," the report states.

The central bank increased its policy interest rate by 0.2 per cent to 2.5 per cent two weeks ago, its first change in a year. Governor Macklem cited the need to curb inflation and prevent energy price spikes from geopolitical conflicts from spreading to other sectors. Shenfeld said the inflation outlook depends heavily on energy markets, noting that a resolution in the Middle East and falling oil prices would dampen price pressures. He warned that rising energy costs would create more of an "inflation problem" and could trigger further rate hikes.

With files from Global News