MNI INTERVIEW: BOC Price Forecast Under Strain-Biz Chamber

The Bank of Canada’s view that inflation will slow late this year is being sorely tested by surging energy costs following the Ukraine invasion and earlier struggles to rebuild supply chains, Canadian Chamber of Commerce chief economist Stephen Tapp told MNI.

“What businesses are saying is that they are increasingly planning to pass those costs on to consumers,” said Tapp, a former researcher at the BOC, the federal trade finance bank, the parliamentary budget office and the finance department.

“This was all happening before the unprovoked incursion into the Ukraine and Russia, and that's going to be yet another stagflationary shock for the economy,” he said. Six in 10 firms were already planning to pass on higher costs over the next 12 months even before the invasion, according to research by the 200,000-member Chamber of Commerce.

The Bank of Canada's January forecast called for inflation to reach 5.1% this quarter and slow to 3% in the fourth quarter, the top of its 1%-3% target band. Tapp said that relative to the Bank’s forecast “if energy prices stay anywhere near what they're like now, that's going to increase gasoline prices, and that's going to on its own mathematically keep things pretty high for longer than people had expected.”

The Bank's inflation outlook “is certainly still possible, but I think the balance of risks are clearly to the upside,” Tapp said. Governor Tiff Macklem said last week after raising rates for the first time in three years that higher crude oil prices may boost inflation in the near term but he didn't provide a detailed outlook.

BROAD-BASED PRICE GAINS

The Chamber is working with the federal statistics office on a new quarterly survey of business conditions, after publishing one already showing broadening pressures on material, energy and wages just before Russia's invasion sent oil prices surging. Extra data will be published in coming weeks, including the finding that 63% of firms struggling with delayed international orders expect difficulties to last for at least six months, up from 56% in Q4.

“People were waiting for improvements and improvements weren’t coming: in fact things were worse. I think for me, (it’s) probably the biggest surprise from the survey,” Tapp said.

Canada has suffered local shocks too, such as flooding in British Columbia, disruption to some farm production, and protests that snarled Ottawa and border crossings, he added. “It’s certainly proving to be a lot more persistent than most people expected,” Tapp said.

Manufacturing and construction face the toughest challenges with supply chains and cost increases. Hospitality firms are also struggling with finding workers again and with food costs, he said. Wages are starting to creep higher to catch up with past inflation gains.

The BOC raised its key interest rate last week to 0.5% from a record low 0.25% and said a path of tightening is needed. Its next full inflation forecast is due in April, and it has said while there's risk of inflation expectations moving higher, its base case remains that something like a half-point rate hike probably isn't needed.