Consumers and businesses expect prices above 3% as energy costs and tariff fears deepen
Canadian consumers and businesses are bracing for inflation to exceed 3% over the next 12 months, as surging energy costs from the Middle East conflict and persistent US tariff pressures erode confidence across the country, according to two Bank of Canada surveys released Monday, July 6.
The central bank's second-quarter Business Outlook Survey (BOS) and Canadian Survey of Consumer Expectations (CSCE) show that elevated oil prices — tied to the ongoing Iran conflict and the prolonged closure of the Strait of Hormuz — are translating directly into higher cost expectations at both the household and corporate level.
Overall business sentiment deteriorated this quarter after improving over the previous three quarters, with sales outlooks softening as fuel-related costs and geopolitical uncertainty mounted.
The share of firms planning for a recession in Canada over the next 12 months rose from 9% to 17%, according to the BOS, though it remains below the levels recorded throughout 2025.
A slightly larger share of consumers than in the previous quarter expect inflation to be above 3% over the next 12 months, with two- and five-year-ahead inflation expectations also edging up.
While tariffs remained the most frequently cited driver of inflation, mentions of energy prices rose from the previous quarter.
Near-term business inflation expectations, tracked through the monthly Business Leaders' Pulse survey, peaked in April and have since declined. The Bank of Canada attributed that shift, in part, to the interim US-Iran agreement signed in mid-June.
For mortgage brokers advising clients on rate strategy, that partial easing does little to change the near-term picture. Canada's annual consumer price index (CPI) hit 3.2% in May, its highest reading since December 2023.
Leah Zlatkin, a licensed mortgage broker at LowestRates.ca in Ontario, told Canadian Mortgage Professional earlier this year that "there's no clear signal that rates are heading materially lower, and in some cases we're already seeing lenders adjust pricing upward."
Spending pulls back as energy costs bite
Consumer spending intentions edged down in Q2 2026, the CSCE found. Higher gasoline prices constrained outlays on travel, dining, and major purchases, while trade tensions compounded cost-of-living anxieties already weighing on households.
"Households expecting the war to raise inflation significantly are also more likely to report other spending changes, such as substituting toward cheaper essentials, reducing discretionary purchases and driving less," the CSCE said.
"Beyond the war in the Middle East, many consumers also believe trade tensions are raising prices and contributing to economic uncertainty."
| Factor | Q1 2026 (%) | Q2 2026 (%) |
|---|---|---|
| Tariffs and other barriers to trade | 29.0 | 26.1 |
| Oil and energy prices ▲ | 5.0 | 16.6 |
| Domestic government spending and tax policy | 13.0 | 11.3 |
| Can$/US$ exchange rate | 10.0 | 8.5 |
| The strength of overall demand | 10.0 | 8.4 |
| High housing costs | 9.6 | 7.8 |
| No factors | 4.7 | 4.7 |
| Wages, labour shortages and other worker disruptions | 5.6 | 4.6 |
| Supply chain issues | 3.5 | 4.2 |
| Businesses trying to increase their profits | 4.1 | 3.0 |
| Other | 3.2 | 2.7 |
| Climate change | 2.4 | 2.1 |
One potential buffer for lower-income households: a one-time top-up to the Canada Groceries and Essentials Benefit. Around 44% of CSCE respondents said they expected to receive the payment, with 49% indicating they intended to spend at least one-quarter of the sum.
That's a sign the top-up "are expected to support spending among many recipient households," according to the survey.
Economists at Scotiabank, RBC, and TD who weighed in after the Bank of Canada's fifth consecutive rate hold in June, expect the policy rate to remain at 2.25% through the rest of 2026.
Douglas Porter, chief economist at BMO Capital Markets in Toronto, captured the tension in a note: "If anything, the threat of higher inflation has rekindled chatter of a potential rate hike in 2026. We still view that as a very long shot indeed, with the economy struggling to grow, core inflation moving closer to the 2% target, and USMCA uncertainty still clouding the outlook."
Labour market softens but Prairies hold firm
Employment intentions among businesses weakened slightly in Q2 2026, weighed down by subdued outlooks across most of Canada, according to the BOS.
Businesses in the Prairies were an exception, with hiring plans rising on the back of higher commodity prices tied to elevated global energy demand.
The CSCE's labour market index edged up slightly from low levels in the previous quarter, partly due to a decline in perceived job-loss risk, including among public service workers, despite recent cuts.
However, concerns remain elevated in trade-exposed sectors and in occupations with higher AI exposure.
The CSCE noted that "the perceived risk of losing a job remains above the historical average among workers in sectors where exposure to task replacement by AI is higher."
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