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Economy and entrepreneurship

Inflation Is Eating into the Profitability of a Growing Number of Canadian Businesses

May 20, 2022

Hélène Bégin
Senior Economist

Households and businesses are feeling the pinch of rapidly rising prices. Costs have been going up for businesses since last year. Everything from transportation to inputs and wages is costing more, eroding profitability. Many businesses are passing on these higher costs to consumers, fuelling inflation in the wider economy.

Here in Canada, commodity prices were up 38.4% in April year over year. Prices for industrial products (materials purchased by businesses to make other goods) jumped 16.4%. But businesses aren’t just facing higher input costs. They’re also dealing with higher prices for air, land and sea transportation, driving up supply and distribution costs in most industries.

Then there’s wage growth. Unemployment peaked in spring of 2020. But workers have been scarce since shortly after the pandemic began. In Canada, the jobless rate fell to 5.2% in April, while average hourly wages were up 3.3% on the year. In Quebec, unemployment hit a record low 3.9%, with average hourly wages surging more than 5.7% since last April. The labour shortage is forcing businesses to hike wages as workers demand bigger raises to keep up with inflation.

In short, the cost of doing business has gone up dramatically due to a number of factors that will be with us for months to come. How will businesses respond? According to a Statistics Canada survey, over a third of businesses intend to raise their prices this spring, but plans vary by sector. The majority of businesses in the accommodation and food services (56.7%), manufacturing (55.7%), wholesale (52.8%) and retail (51.7%) sectors plan to bump up prices.

According to an April survey by the Canadian Federation of Independent Business, SMEs think they’ll have to hike prices nearly 5% on average over the next year. That means they’ll try to pass on some of their higher costs if they can’t offset them by boosting productivity. According to Statistics Canada, about a third of Canadian businesses expect their profits to shrink this spring.

In the StatCan survey, about three quarters of businesses said they have enough cash on hand to stay afloat for three months. A quarter do not. Business insolvencies in Canada declined 24.3% in 2020 and 11.0% in 2021 thanks to government and financial institution relief measures. But they’re on the rise again, and we expect that trend to continue in the coming months. To top it all off, borrowing will become more expensive as interest rates go up. Just one more challenge for highly leveraged businesses and sectors with already slim profit margins.

Read the full commentary: Inflation Is Eating into the Profitability of a Growing Number of Canadian Businesses