Amid persistent inflation signals, it’s widely expected that when the Bank of Canada makes a rate move, it will be a hike. But CIBC World Markets isn’t convinced that stronger cost pressures are looming, or that monetary policy will have to tighten anytime soon.
In a new report, the bank’s economists noted that ongoing concerns about trade tensions, and their impact on inflation, have kept the central bank cautious about adding monetary stimulus.
“[The Bank of Canada has] cited the fallout from rejigging global supply chains in the wake of U.S. tariffs, higher prices [for] goods imported from the U.S. that incur tariffs on inputs, and earlier in the year, a hit from Canada’s own retaliatory tariffs,” it noted.
These concerns about “cost-push” inflation have continued to linger, it said, with households potentially facing pricier imports and/or rising costs for domestic production.
On the import front, CIBC said that, with a couple of exceptions (such as autos), imports of finished goods aren’t dominated by products from the U.S. So, while higher tariffs may drive U.S. manufacturers to raise prices on their imports to Canada, this doesn’t represent a large share of finished consumer goods that are sold in Canada — and isn’t a strong driver of consumer inflation.
And, while the Bank of Canada is also worried that foreign producers will hike their prices due to the impact of higher U.S. tariffs, CIBC said that the “reverse seems more likely.”
Instead, it suggests that U.S. tariffs may leave foreign manufacturers with excess capacity, prompting them to lower prices for Canadian markets to maintain their sales volumes.
“If, for example, a Korean carmaker can only pass on half of the 15% U.S, tariff to its American customers, and therefore absorbed a 7.5% net price cut, it would still net a better year-on-year price change in Canada if it cut its price to this market by, say, 5%,” the report said.
As for the other possible source of cost-push inflation — higher Canadian producer prices, given the recent rise in industrial product prices — here too, CIBC is relatively optimistic.
For one, it noted that the increase in industrial product prices is relatively narrow — it’s being driven largely by soaring gold prices and higher meat prices — and neither category is likely to lead to strong inflation.
While higher gold prices may drive the cost of jewelry up, this represents a tiny share of the consumer goods segment, the report said. And, the impact of higher meat prices is typically felt rather quickly, given the short inventory cycle for these kinds of products — so, any cost increases there are already reflected in consumer prices, and not a signal of higher prices down the road.
“All told, we don’t see persuasive evidence that either import prices or domestic production costs are destined to accelerate or that cost increases have yet to filter through,” the report said.
And, at the same time, recent wage data suggests “the trend appears to be towards more moderate pay hikes,” the report said. Average unit labour costs are up just 1.1% this year, for example, down from 2.6% in 2024.
“On the demand side, Canada still has economic and labour market slack,” it said. Rental demand has also weakened.
“All of that is an important wall of resistance against cost escalations being fully passed on [to consumers],” the report said — adding that recent survey data suggests that businesses are expecting to see their margins squeezed.
“If they’re right about their own markets, policymakers will have less to fear from cost-push inflation than they think,” it said. As a result, “Bank of Canada rate hikes should still be a long way off.”