A growing share of Canadian businesses is preparing to make customers absorb at least part of the cost of higher tariffs and energy prices. The Bank of Canada’s latest Business Outlook Survey found that roughly half of firms plan to pass on some or all of cost increases connected to trade tensions and the Middle East conflict, more than in the previous quarter.
The finding adds another layer to Canada’s inflation challenge. Businesses have already spent months absorbing higher transportation, fuel, imported-input and tariff costs, often at the expense of profit margins. Now, with some demand conditions improving, more companies appear willing to raise prices. At the same time, consumers remain cautious, creating a delicate balancing act between protecting margins and avoiding lost sales.
Half of Firms Are Preparing to Pass More Costs to Customers
The Bank of Canada’s third-quarter Business Outlook Survey delivered a clear change in corporate pricing intentions. Roughly half of participating firms said they expect to pass some or all of cost increases related to tariffs and the Middle East conflict on to their customers. That proportion increased from the previous quarter. Consumer-facing businesses were particularly likely to say that cost increases already absorbed earlier in the year could continue appearing in their prices over the next 12 months.
There is an important qualification behind that headline. The Bank conducted its main Business Outlook Survey interviews between August 6 and September 2, and roughly three-quarters were completed before Canada-U.S. trade negotiations broke down on August 21. Information collected after the breakdown was generally more pessimistic: companies reported weaker sentiment and export expectations alongside greater pressure on costs and prices. The traditional Business Outlook Survey covers senior executives at roughly 100 firms selected to reflect the composition of Canada’s business economy, while the Bank’s complementary monthly Business Leaders’ Pulse reaches roughly 700 to 1,000 business leaders.
Higher Energy Costs Are Spreading Far Beyond the Gas Pump
For businesses, an energy shock does not stop with what employees or delivery trucks pay at the fuel station. Earlier Bank of Canada research showed that companies were encountering higher shipping and transportation expenses, while manufacturers also reported cost increases for petroleum-derived materials such as resins and foams. Nearly three-quarters of firms in the Bank’s second-quarter survey said their costs had risen because of the Middle East conflict, with fuel-related expenses playing a major role.
That helps explain how an oil shock can migrate from gasoline prices into the cost of ordinary products and services. A restaurant depends on food deliveries, a retailer pays freight on inventory and a manufacturer may use petroleum-based components or packaging. In its July Monetary Policy Report, the Bank estimated that the direct effect of higher gasoline prices would add roughly 1.4 percentage points to inflation at its second-quarter 2026 peak. It also estimated that indirect war-related costs passing through businesses could add roughly another 0.4 percentage points to CPI inflation at their projected peak in the first quarter of 2027. Those estimates illustrate why policymakers are watching business pricing decisions so closely.
The Tariff Shock Intensified After Canada-U.S. Talks Broke Down
Trade costs became more complicated near the end of the Bank’s survey period. After Canada-U.S. negotiations broke down in August, the United States imposed a new 50% tariff covering $27.6 billion of Canadian goods effective August 22. Ottawa subsequently announced matching countermeasures covering $27.6 billion of U.S. imports, with tariff rates of 15%, 25% or 50% on targeted products beginning September 8. The Canadian measures were concentrated in areas including steel, dairy products, appliances, agricultural equipment, pulp and paper, plastics and electronics.
Those measures do not simply affect companies that directly import a finished product. Tariffs can work their way through multiple stages of a supply chain when a distributor, manufacturer or contractor buys an affected material and then passes part of its additional expense to the next business. The Bank found that firms questioned after the collapse of trade negotiations were more likely to report trade tensions increasing both their costs and selling prices. Importantly, the share reporting higher costs was still larger than the share reporting higher prices, indicating that businesses continue to absorb part of the tariff burden rather than transferring it all immediately to customers.
Businesses Are Trying to Rebuild Margins They Previously Sacrificed
Companies do not necessarily raise prices the moment their costs increase. During weaker periods, businesses often accept smaller margins rather than risk losing customers. The Bank’s latest findings suggest that this calculation is beginning to change for some firms. Businesses planning additional price increases frequently pointed not only to tariffs or fuel expenses but also to a desire to recover margins that had been compressed by earlier cost shocks. Somewhat stronger demand conditions are giving certain firms more room to make those adjustments.
There were signs of improvement before the latest escalation in the trade dispute. The share of businesses planning or budgeting for a Canadian recession during the next 12 months fell to 6% in the third quarter from 17% in the second quarter. Firms also reported stronger past sales and better indicators of future sales, while businesses in consumer discretionary industries noted stronger demand for budget-friendly products and increased tourism. That backdrop matters because pricing power depends heavily on whether customers are willing to keep buying. The picture deteriorated after the August trade breakdown, however, meaning that the apparent improvement in pricing power may be fragile rather than broad-based.
Not Every Business Can Pass Through Costs at the Same Speed
The Bank’s earlier findings illustrate how differently companies can respond to the same shock. In the second quarter, among firms experiencing fuel and non-fuel cost increases related to the Middle East conflict, roughly 40% said they were not passing those increases on to customers. Another 25% were passing them through only partially, while roughly one-third expected to fully pass on the additional costs during the next 12 months. The mix can change over time, but it shows why higher input costs do not translate into a uniform increase at the cash register.
Business models make a major difference. Some companies operate under long-term contracts that prevent immediate price changes. Others sell products whose prices are largely determined in global markets or face intense competition that makes increases risky. At the opposite end are businesses with formal mechanisms such as fuel surcharges or contract clauses that automatically adjust prices when expenses rise. Thin-margin businesses can also have little room to absorb a shock. The latest third-quarter results suggest competitive pressure remains a significant restraint even as more firms consider additional increases.
Consumers Are Already Responding by Cutting Back
Businesses considering higher prices face an uncomfortable reality: many Canadian households are already reluctant to spend. The Bank of Canada’s third-quarter Canadian Survey of Consumer Expectations found that spending intentions deteriorated from levels that were already below their historical average. High prices remained the biggest reported barrier to additional spending. In follow-up interviews, consumers described reducing discretionary purchases, eating out less, hunting for deals and switching to cheaper alternatives.
That behaviour creates a natural limit on how aggressively companies can pass along costs. Nearly half of consumers surveyed believed the most serious economic or inflationary effects of Canada-U.S. trade tensions were still ahead, and those respondents were more likely to postpone major purchases. About half continued to expect a Canadian recession during the next year. Consumers also identified tariffs and trade tensions as their biggest perceived influence on inflation, while energy prices remained another widespread concern. The result is a difficult feedback loop: businesses need to defend margins after repeated cost shocks, but pushing prices too aggressively can weaken demand further and encourage households to trade down, delay purchases or simply go without.
Headline Inflation Is High, but the Underlying Picture Is More Complicated
Statistics Canada reported that consumer prices were 3.1% higher in September than a year earlier, up from 3.0% inflation in August. Energy was the major source of pressure. Gasoline prices were up 27.8% year over year, while the broader energy component increased 19.0%. Strip gasoline out of the index and inflation was considerably lower at 2.2%. The Bank of Canada’s CPI-median and CPI-trim measures were also comparatively subdued at 1.9% and 1.8%, respectively.
That distinction matters because the next stage of the inflation story depends partly on whether elevated energy and tariff costs spread more broadly. The Parliamentary Budget Office now expects CPI inflation to average 2.8% in 2026. Its October outlook projects that higher energy costs associated with shipping disruptions, together with Canadian trade countermeasures, will outweigh some of the downward pressure created by an economy operating below capacity. The PBO expects the indirect transmission of higher energy costs to push core inflation above a 2.5% annualized rate late in 2026. In other words, current inflation is heavily energy-driven, but increased business pass-through could make the pressure more persistent.
Companies Are Rebuilding Supply Chains Instead of Simply Raising Prices
Price increases are only one part of the business response. Bank of Canada consultations found that firms have been changing suppliers and sourcing inputs from alternative jurisdictions in an effort to reduce exposure to tariffed products. Others are spending more on technology, automation and artificial intelligence to improve efficiency and offset additional trade-related costs. These investments can reduce the amount of a cost shock that eventually has to be recovered through higher customer prices.
Companies are also searching for new markets. The Bank cited aluminum producers pursuing European customers and steel companies expanding their Canadian business through federal procurement and defence spending. Other firms are taking more defensive measures, including cutting production capacity or employment, postponing investment and, in some tariff-exposed steel and automotive businesses, shifting investment outside Canada. Some executives described these moves as temporary and potentially reversible if tariffs disappear. Others are making permanent changes. That distinction could matter well beyond the current inflation cycle because prolonged tariffs can alter where companies source goods, build factories, hire employees and ultimately decide to invest.
The Bank of Canada Now Faces Opposing Risks From Inflation and Growth
The increased willingness of companies to pass costs through comes at an awkward time for monetary policy. The Bank of Canada held its overnight rate at 2.25% on September 2, warning that persistent energy costs increased upside risks to inflation while new tariffs created additional uncertainty for economic growth. Governor Tiff Macklem has described the forces as pulling in different directions: trade barriers can weaken activity and investment, while elevated energy prices push inflation higher.
The next interest-rate decision and Monetary Policy Report are scheduled for October 28. The business findings will therefore be part of a much larger set of evidence officials must weigh. Higher headline inflation and greater cost pass-through argue for caution about allowing inflation expectations to become entrenched. Weak consumer spending, spare business capacity and tariff-related threats to exports and investment point the other way. What ultimately matters is not whether every temporary fuel or tariff increase reaches consumers, but whether repeated shocks begin producing sustained, broad-based price increases. The latest business responses show that the risk of that second-round effect has become harder to dismiss.
