State of inflation: How Canadian businesses are reacting

When the COVID-19 pandemic emerged in 2020, fears of an economic crisis loomed large. Business sentiment was negative, sales were in a slump, and most sectors planned to slash their spending. ¹ The Canadian economy, however, not only survived but in many cases ended up thriving. The upheaval also served as a trigger for many businesses to adapt, innovate and accelerate their digital plans.

Fast forward to more than two years later and the economy is again treading in unfamiliar waters. This time, inflation is a significant challenge as rising prices—combined with labour shortages, supply constraints and fluctuations in demand—are creating a highly volatile business landscape.

According to Statistics Canada, domestic inflation has been driven to its highest level in decades. ² The pace of inflation accelerated in 2022 to a 39-year high in June of 8.1% before slightly easing to 7.6% in July. ³ The latest result is the first decrease in 12 months following consecutive major increases earlier in the year, including 6.8% in April and 7.7% in May.

While inflation has slightly decreased, it still remains far too high. ⁴ Higher prices are expected to persist in 2023 and the Bank of Canada doesn’t foresee a return to its 2% inflationary target until the end of 2024. ⁵ Confronted with this reality, the central bank has pulled out its toolbox of interest rate hikes in its efforts to tame inflation. Rate increases have intensified throughout 2022 and included the biggest increase seen in 20 years. ⁶ Further increases remain on the table as the bank tries to cool an overheated economy.

Soaring prices and rising interest rates have been painful and persistent pinch points, squeezing businesses across the board and creating economic uncertainty. And while attitudes may be evolving as quickly as economic indicators, it’s evident that inflation is a key concern among Canadian business leaders. This sentiment is reflected in the Grant Thornton International Business Report (IBR), the world’s leading survey of mid-market companies. The 2022 report, which includes the responses of more than 250 Canadian business leaders, provides a comprehensive overview of the challenges mid-market businesses are facing and offers thoughtful insights into the road ahead.

When looking at barriers to growth, Canadian businesses are clear that inflation is the top challenge.

According to the IBR research, when asked about specific constraints to expansion and growth, respondents identified labour costs and energy costs as the greatest issues. And those costs, along with others, are up considerably for Canadian businesses. According to the survey results, raw materials, energy/utilities and transportation have all spiked 18% for Canadian respondents over the past year. Rising equipment costs, wages and interest payments are not far behind, suggesting that many businesses are feeling cost increases across a wide spectrum.

Figure 1: Average increase in costs over the past 12 months

While the price of gasoline has recently dropped, it’s worth noting that energy costs are only a part of the inflation picture. While the Consumer Price Index (CPI) decelerated in July, prices still increased 6.6% year-over-year when gasoline is stripped out. That’s slightly ahead of the 6.5% annual increase seen in June. ⁷

Despite the impact inflation is having, the IBR data suggests Canadian businesses have been slow to act. In fact, the report shows that common actions to combat inflation are being pursued by only about a quarter of mid-market businesses. This is an alarming figure and one that points to a potentially difficult road ahead.

With inflation expected to remain a persistent and pervasive reality, Canadian businesses should do more to manage the impacts during this time and remain competitive in the future. This includes arming themselves with the information they need in order to take strategic and decisive action.

_{1 Bank of Canada, July 6, 2020. “Business Outlook Survey – Summer 2020.”
2 Statistics Canada, July 20, 2022. “Consumer Price Index, June 2022.”
3 Statistics Canada, Aug 18, 2022. “Consumer Price Index, July 2022.”
4 National Post, August 16, 2022. “Tiff Macklem: We're determined to eliminate high inflation and return to our 2% target.”
5 Bank of Canada, July 13, 2022. “Monetary Policy Report Press Conference Opening Statement.” Tiff Macklem.
6 Bank of Canada, July 13, 2022. “Bank of Canada Increases Policy Interest Rate by 100 Basis Points, Continues Quantitative Tightening.”
7 Statistics Canada, Aug 18, 2022. “Consumer Price Index, July 2022.”}