The Bank of Canada just released the results from its latest quarterly Business Outlook Survey (BOS) and Canadian Survey of Consumer Expectations (CSCE).
Both consumers and business leaders now expect inflation to rise above three per cent over the next 12 months. While inflation has moderated considerably since 2022, renewed geopolitical tensions and trade uncertainty shifted expectations once again.
The conflict in the Middle East and continued U.S. tariff policies are influencing how Canadians think about spending, hiring, wages and the broader economy.
Energy prices drive inflation concerns
Oil and energy prices are among the largest factors driving inflation expectations.
The Bank of Canada found that elevated fuel costs have pushed both businesses and consumers to anticipate stronger inflation over the coming year.
Nearly three-quarters of businesses surveyed reported experiencing higher costs because of rising fuel prices associated with the conflict involving Iran.
At the same time, approximately one-fifth of businesses also cited U.S. tariffs and trade policies as a source of ongoing cost pressures. While that represents a smaller share than in the previous quarter, trade uncertainty continues to influence business planning and pricing decisions.
At the same time, business leaders’ short-term inflation expectations have gradually eased since April. The lowest recorded expectations were documented after the U.S. and Iran reached an interim agreement in June.
Consumers are more cautious
As inflation expectations rise, many Canadians appear to be tightening their budgets.
The Bank of Canada’s consumer survey found that spending intentions edged lower during the second quarter of 2026.
Respondents pointed to concerns that higher energy prices could keep inflation elevated, while ongoing trade tensions continue to create uncertainty about the economic outlook.
Persistent concerns about the overall cost of living also remain a significant factor.
Businesses that depend on discretionary consumer spending are already beginning to feel the effects. According to the Business Outlook Survey, higher gasoline prices have reduced spending on travel, dining out and larger household purchases.
The consumer survey also highlights how Canadians are adapting spending habits:
“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 report adds:
“Beyond the war in the Middle East, many consumers also believe trade tensions are raising prices and contributing to economic uncertainty.”
Together, these responses suggest that inflation expectations are influencing consumer behaviour well before higher prices are fully reflected in the marketplace.
How government support impacts spending pressures
The surveys also examined the impact of the federal government’s one-time top-up to the Canada Groceries and Essentials Benefit.
Roughly 44 percent of respondents expected to receive the payment. Among those households, spending plans varied considerably:
- 43 per cent said they expected to spend less than one-quarter of the payment.
- 49 per cent anticipated spending one-quarter or more of the benefit.
The Bank of Canada concluded that households intending to spend a larger share of the payment generally reported more optimistic spending intentions overall.
“Households expecting to spend more than 75 per cent of the payment report spending intentions that are less negative than households expecting to spend less than 25 per cent of the payment. These results suggest that the top-up payments are expected to support spending among many recipient households.”
While the benefit is temporary, it may provide modest support for consumer spending at a time when many households continue to face higher living costs.
Mixed signals from the labour market
Canada’s labour market continues to soften, although there are signs that conditions may be stabilizing.
Business hiring intentions weakened slightly during the second quarter of 2026 as many companies adopted a more cautious approach. The slowdown was most noticeable outside the Prairie provinces.
In contrast, businesses across the Prairies reported stronger hiring intentions. This is supported by higher commodity prices that have improved business conditions in resource-based industries.
Wage expectations remain relatively restrained as well. Although cost-of-living adjustments continue to place upward pressure on compensation, weaker business profitability has offset much of that pressure. As a result, expected wage growth is relatively modest over the next year.
Job security is insecure
Workers are feeling slightly more confident than they were a few months ago, but uncertainty remains.
The Bank of Canada’s labour market index improved modestly during the second quarter as fewer respondents believed they were at immediate risk of losing their jobs.
This improvement was especially noticeable among workers employed in industries heavily exposed to U.S. tariffs and trade policies. Public sector employees also reported a lower perceived risk of job loss despite recent workforce reductions.
Even so, many Canadians continue to describe the labour market as subdued.
Trade uncertainty remains a concern for many industries, while the growing role of artificial intelligence is adding another layer of uncertainty for some workers.
The survey notes:
“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.”
How is Canada looking ahead?
The latest Bank of Canada surveys paint a picture of an economy that continues to adjust to several competing forces.
Businesses are managing higher operating costs while navigating geopolitical uncertainty and evolving trade policies.
Consumers remain cautious as concerns about inflation, energy prices and affordability influence spending decisions.
Meanwhile, the labour market continues to show resilience in some regions while remaining fragile in others.
Although inflation expectations have moderated somewhat since peaking earlier this year, the surveys suggest Canadians remain highly attentive to global events and their potential impact on everyday costs.
For businesses, households and policymakers alike, the coming months will likely be shaped by how these external pressures evolve and whether inflation continues its gradual path toward greater stability.
For more articles about business, finance and the economy, click here.
