Canadian retailers and wholesalers may use their current profit margins to absorb rising production and import costs rather than raising consumer prices. This trend could result in lower inflation rates than the Bank of Canada currently projects for 2027, potentially reducing the need for future interest rate hikes.

Why is the inflation outlook changing?

The Bank of Canada has anticipated that inflation will remain above 3% for much of next year. However, CIBC economists Avery Shenfeld and Helen Lao suggest this forecast may be too high. They argue that businesses lack the pricing power to shift costs to the public without losing significant sales volume.

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Several economic factors are contributing to this shift:

  • Elevated profit margins for wholesalers and retailers compared to historical averages.
  • A softer labour market, with unemployment at 6.7% in October 2026.
  • Moderate growth in worker incomes and consumer spending power.

How do business costs compare to consumer prices?

There is a growing gap between the cost of doing business and the prices paid at the register. While consumer inflation (excluding gasoline) was 2.2% recently, business-side costs have climbed significantly. For example, the wholesale trade price index rose 7.3% year-over-year, and imported consumer goods increased by 8.9%.

In a stronger economy, such as in 2022, higher wages allow consumers to absorb these hikes. In the current environment, CIBC notes that "price increases didn't stick as easily" when the economy was softer. This suggests businesses may choose to protect their margins rather than risk driving customers away.

FAQ

What is the main driver behind this potential inflation drop?

High profit margins in the supply chain allow businesses to act as a cushion against rising input costs.

How does this affect interest rates?

If inflation stays lower than expected, the Bank of Canada may face less pressure to increase interest rates.