Toronto: The war in Iran is driving up inflation expectations in Canada and prompting households to scale back spending, according to Bank of Canada survey data released Monday.
According to Anadolu Agency, the central bank reported that Canadian firms increased their one-year inflation expectations to 3.8% at the end of March, rising from 3% in February. Expectations for inflation two years and five years ahead also climbed to 3.4% and 3%, respectively, from a previous 2.8%.
More than 80% of households surveyed expressed concerns that the war would negatively impact the Canadian economy and further elevate inflation. Among consumers contacted after the conflict's onset on February 28, 21% reported canceling or postponing trips primarily due to higher travel costs, while 28% indicated they had delayed or reduced major purchases.
The Bank of Canada noted that its primary business and consumer surveys for the first quarter were completed before the conflict began. However, follow-up calls were conducted with firms most susceptible to increased energy prices and with a subset of households.
Numerous businesses indicated they had raised expectations for input costs, pointing to fuel, freight, fertilizers, and exchange rates as contributing factors. Sectors heavily reliant on fuel, such as agriculture, oil and gas, transportation, and parts of manufacturing, were already experiencing heightened prices.
Simultaneously, firms reported that weak demand, tight household budgets, competition, existing contracts, and limited pricing power were hindering many from fully passing increased costs on to consumers, with some businesses absorbing part or all of the cost surge.
These findings resonated with the Bank of Canada's March decision to maintain its policy rate at 2.25%, when officials stated they would overlook the immediate oil-price shock. The next rate decision is set for April 29.
Prior to the war, the bank observed that Canadian consumers' near-term inflation expectations exceeded historical averages, partly due to consistently high food prices. Grocery prices in March saw a year-on-year increase of 4.4%, following a 4.1% rise in February.
At the same time, energy prices surged 21.2% in March compared to February, while consumer prices rose 0.9%, as reported by Statistics Canada on Monday. The annual inflation rate increased to 2.4% from 1.8% in February.
