The contribution of businesses to the strong inflationary surge is not fading. At most, we can foresee an increase in sales prices at a slower pace.
Larger and more frequent price increases than before the pandemic remain the game plan for many companies. In the Bank of Canada’s just-released Third Quarter 2023 Business Outlook Survey, nearly half of respondents described their pricing practices as abnormal and indicated that this would be the case for the next 12 months. Overall, however, businesses expect to increase their selling prices at a slower pace than over the past 12 months, reflecting the slowdown in wage increases and the slowdown in the cost of their inputs.
That said, even if some companies “continue to pass on to their customers the exceptionally sharp cost increases they faced at the start of the pandemic […], there are signs that pricing practices are becoming normalized,” the survey reads. In fact, almost a third of respondents “who made unusually large price changes in the past 12 months said the size of their price increases would be near normal over the next 12 months.”
A large contribution to inflation
These new perspectives are reminiscent of Nicolas Vincent’s comments that businesses have largely contributed to the inflationary surge. In a speech made on October 3 to members of the Chamber of Commerce of Metropolitan Montreal, the Deputy Governor of the Bank of Canada was unequivocal. Towards the end of the pandemic lockdowns, companies significantly changed the way they set their prices, driven by higher input costs, but also and above all strong demand. “They told us that they are now increasing their prices more substantially and more frequently than normal. This corporate response — here and abroad — is believed to be closely linked to the high inflation during this period. »
However, economic theory reveals a certain rigidity in prices. Businesses, at least most of them, do not adjust their prices every time there is a change in their costs, demand or competition. Such a change can be a complex and costly process. “To summarize, even when the business context justifies a price increase – for example when the cost of inputs increases – a company must evaluate the benefits and risks that this entails. »
“During the post-pandemic recovery, businesses began to tell us that their costs were increasing rapidly and that demand for their products and services was high. As for customers, they had little choice since supply was limited in many sectors. Businesses also told us that their customers, who were aware of widespread cost pressures, seemed less reluctant than usual to pay more. Faced with this new reality, companies reacted with higher and more frequent price increases than usual,” explains Nicolas Vincent.
Little progress
Observations indicate that these companies still expect to make larger and more frequent price adjustments than before the pandemic, which is reflected in the survey published on October 16. In other words, “if their practices seem to be returning to normal since the start of the year, it must be admitted that progress remains limited”.
Above all, the Deputy Governor fears that these recent unusual practices could become entrenched, leading to more substantial and more frequent price adjustments than before, despite an easing of pressure on input prices. As an illustration, in the grocery sector, the deputy governor mentions electronic labels, which make it possible to change prices more often at lower cost. In addition, the consolidation of certain sectors, including the food sector, alleviates these competitive pressures which limit price increases.
On this point, research carried out in all sectors by the Competition Bureau precisely indicates that the intensity of competition in Canada decreased between 2000 and 2020, underlined on October 5 the commissioner of the institution, Matthew Boswell, which plans to publish a report in the coming weeks.
Small consolation, profit margins would have remained fairly stable in most sectors since the start of 2022, underlines Nicolas Vincent, taking up the finding of a study recently carried out by analysts from the Bank of Canada suggesting in this direction . “That said, even if profit margins have not increased, consumers are the ones who end up picking up the bill. »
And Mr. Vincent adds that it is still legitimate to wonder to what extent sales prices reflect increases in companies’ costs. To then conclude that “it now remains to be seen whether the recent reductions in the costs of certain inputs will be passed on to prices as quickly and fully as the increases of the last two years”.