Canada business inflation expectations surged during Iran conflict, BoC survey shows

Share of firms expecting above-3% inflation over two years quadrupled

The Bank of Canada’s second-quarter business-outlook survey, based on phone and video interviews conducted from May 1 to May 21, captured a sharp deterioration in inflation sentiment during the height of uncertainty over the Iran conflict. The survey showed that expectations for higher prices — both what firms pay for nonlabor inputs and what they intend to charge customers — reached levels last recorded in early 2023.

The share of respondents anticipating inflation above 3% over the next two years jumped to 44% from 11% in the first quarter. The survey also reported that firms’ sales outlooks softened slightly, reflecting a slowdown in business and consumer spending tied to rising fuel-related costs.

The central bank acknowledged that some responses recorded in June, after the signing of an interim agreement between the United States and Iran that allowed oil-tanker traffic to resume through the Strait of Hormuz, showed a notable cooling in inflation expectations. Bank of Canada Gov. Tiff Macklem said in late June that the truce in the Middle East removes some upside risk on inflation.

Economists cautioned that the survey’s May timing limits its relevance to the current economic environment. Tiago Figueiredo, an economist at Desjardins Securities, said the average price for a barrel of crude oil in May was about $90, while the price on Monday was in the high-$60 range. “The surveys warrant more careful interpretation than usual, with an emphasis on identifying signals that remain relevant under today’s conditions,” he said.

Canada’s annual inflation accelerated in May to a two-year high of 3.2%, though Macklem said there was limited evidence of higher energy prices spreading to other goods and services. The Bank of Canada sets rate policy to achieve and maintain 2% inflation, the midpoint of its 1%-to-3% target range.

Robert Kavcic, an economist at BMO Capital Markets, said a survey gauge of business activity still pointed to an economy performing below potential. “Some of the concerns over growth in this report, and especially on inflation, should be behind us,” he said.

Canada’s economy rebounded in April, according to Statistics Canada, and is on track for growth of more than 2% annualized in the second quarter, offering relief after two straight quarters of economic contraction. Bank of Canada officials debunked talk of a recession in minutes of their latest deliberations.

The Bank of Canada has kept its main interest rate steady at 2.25% since the fall of 2025, and most economists expect no change through 2026. In their most recent published minutes, policymakers said they did not want to overreact to the jump in energy prices but also did not want to be slow to react to any spillover that might accelerate inflation. The survey provides key data for the central bank’s next rate-policy decision on July 15.