April 7, 2014 / 2:33 PM / in 5 years

Canada businesses see weaker C$ raising their costs, not CPI

OTTAWA (Reuters) - Canadian businesses widely expect their input costs to rise as a result of the weaker Canadian dollar, but they’re not necessarily passing on those higher costs to consumers because of intense competition, a central bank survey showed on Monday.

The Bank of Canada’s first-quarter survey of business managers suggests inflation may still take some time to pick up speed. The inflation rate, which has stayed below the central bank’s 2 percent target for 22 months, is currently the bank’s biggest concern.

Other results of the survey show companies expect some improvement in sales, that they plan to invest more in machinery and equipment, and to hire more staff. Their responses to these questions were little changed from the previous survey in the fourth quarter.

The central bank said there was a “widespread view” that the depreciation of the currency, while helping boost export sales, would raise the price of products and services companies purchase. The Canadian dollar has fallen by about 7 percent against the U.S. dollar since last October.

Asked about the rate of input price inflation, 47 percent of businesses said they saw the rate increasing at a faster pace in the next 12 months than in the previous 12. That was up from 29 percent in the fourth-quarter survey. Ten percent saw prices increasing at a lesser rate for a balance of opinion - the difference between the two - of 37, versus 19 previously.

But the balance of opinion on output price inflation rose less dramatically, to 14 from 9.

“Some firms hope to be able to at least partially pass higher costs from the exchange rate depreciation through to output prices. For others, particularly businesses in Central and Eastern Canada, intense competition continues to exert downward pressure on output prices,” the bank said in its report.

More than 90 percent of companies surveyed said consumer inflation will remain within the Bank of Canada’s comfort zone of between 1 and 3 percent over the next two years, with 63 percent pegging it at the lower end of that range.

Reporting by Louise Egan; Editing by Peter Galloway

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