Bank of Canada Says Canadians Still Expect Tariffs to Keep Inflation Above Target

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At grocery aisles, gas stations, car lots and kitchen tables, inflation is no longer just a national statistic. It is a lived calculation: what can be delayed, what can be substituted, and what still has to be paid for. The Bank of Canada’s latest household expectations release shows that many Canadians still believe price growth will stay above the central bank’s comfort zone, with tariffs and trade tensions remaining at the centre of those concerns.

The message is not simply that Canadians expect prices to rise. It is that they are still connecting inflation to forces outside their direct control: U.S. trade policy, global energy shocks, supply-chain costs and uncertainty around where the economy is headed next.

Inflation Expectations Are Still Sitting Above the Bank’s Target

The Bank of Canada aims to keep inflation at the 2 per cent midpoint of a 1 to 3 per cent control range, but Canadian households are still looking well above that mark. In the second quarter of 2026, consumers expected inflation of about 4.08 per cent over the next year, 3.97 per cent over the next two years and 3.39 per cent over the next five years. Those figures suggest that the inflation shock of recent years has not fully faded from public thinking.

That matters because inflation expectations can become part of the inflation process itself. A family that expects groceries, gasoline and rent to keep rising may cut restaurant meals, delay vacations, shop harder for discounts or push for higher pay. A business that hears customers expect higher prices may decide it has more room to pass along costs. The Bank is watching this psychology closely because confidence in the 2 per cent target is one of the tools that helps keep actual inflation from drifting higher.

Tariffs Remain the Price Driver Canadians Mention Most

The most striking part of the Bank’s findings is that tariffs and trade tensions are still the most frequently cited reason consumers expect inflation to remain elevated. Even as other issues have entered the picture, Canadians continue to see the U.S. trade conflict as a direct threat to household budgets. For many people, tariffs are not an abstract policy debate. They show up as higher costs for imported goods, materials, shipping and, eventually, finished products on store shelves.

The concern is especially understandable in a country so tied to cross-border supply chains. Cars, machinery, food packaging, construction materials and retail goods often move through multiple stages before reaching consumers. A tariff at one point in that chain can raise costs further down the line. The Bank’s follow-up interviews captured that logic in plain language, with respondents describing raw materials becoming more expensive and businesses having to pass those increases on to customers.

Energy Prices Have Added a Second Inflation Shock

Tariffs may still be the dominant inflation concern, but energy prices became a much bigger part of the story in the second quarter. The Bank found that consumers increasingly pointed to gasoline and energy costs as a reason inflation could stay high. That shift lines up with official inflation data showing Canada’s annual consumer price index rising to 3.2 per cent in May, driven heavily by gasoline prices.

Energy prices matter because they spread through the economy quickly. A higher pump price does not just affect commuters. It raises transportation costs for food distributors, delivery companies, airlines, construction firms and manufacturers. A grocery shopper may first notice the price of filling the car, then later see higher costs in fresh produce, packaged goods or travel. This is why energy shocks can feel broader than they first appear, even when central bankers view part of the increase as temporary.

Consumers Are Responding by Pulling Back

The Bank’s data show that inflation expectations are changing household behaviour. Nearly 60 per cent of respondents said they were cutting spending or pushing back major purchases because of their inflation outlook. About 42 per cent said they were shopping around for better deals, while roughly one in five said they planned to work more hours. These are not dramatic individual choices, but across millions of households they can reshape the economy.

That pullback is especially visible in discretionary spending. When gasoline, groceries and other essentials take up more of the monthly budget, families often trim the flexible categories first: dining out, weekend travel, furniture, entertainment or vehicle upgrades. The Bank also found that expected spending growth was higher than expected income growth, which helps explain the pressure. If households expect spending to rise faster than income, caution becomes a form of self-defence.

Businesses Are Still Facing Cost Pressure

The household side of the story is only half of the inflation picture. Canadian businesses are also dealing with higher costs, and many still see tariffs as part of the problem. Statistics Canada found that 28.3 per cent of businesses had passed cost increases related to tariffs on to customers over the previous 12 months. Another 33.8 per cent said they were very or somewhat likely to pass tariff-related cost increases on over the next year.

That does not mean every firm is raising prices aggressively. The Bank’s business findings show a more complicated picture. Some firms are absorbing costs because demand is weak, competition is strong or contracts limit price changes. Others use fuel surcharges, cost escalators or fixed-margin pricing models that automatically move costs through to customers. This uneven pass-through is why inflation can feel different depending on the sector: a manufacturer, restaurant, airline and homebuilder may all face cost pressure, but they may not have the same ability to raise prices.

The Labour Market Looks Softer, Even as Job-Loss Fears Ease

One reason inflation has not become even more entrenched is that the labour market is not showing the same heat seen earlier in the post-pandemic period. The Bank found that consumers’ perceived probability of losing a job fell in the second quarter, including among workers in sectors more exposed to Canada-U.S. trade. That is a helpful sign because job insecurity can sharply reduce household spending.

Still, the broader labour-market mood remains cautious. The Bank said consumers continue to view the labour market as subdued, partly because of economic uncertainty and concerns about artificial intelligence. Businesses also reported weaker employment intentions than their historical average. For workers, this creates an uncomfortable mix: prices still feel high, but bargaining power may not be strong enough to fully offset those increases through wages.

The Bank of Canada Is Caught Between Weak Growth and Inflation Risk

The Bank of Canada held its policy rate at 2.25 per cent in June, a decision that reflected a difficult trade-off. Economic activity has been soft, trade uncertainty remains elevated and employment has shown little net momentum since the start of the year. Under normal conditions, that might argue for lower interest rates. But inflation rose in the spring, and the Bank does not want temporary energy or tariff shocks to become persistent.

This is the central dilemma. If the Bank cuts rates too soon, it risks adding fuel to inflation expectations. If it keeps rates too restrictive for too long, it risks worsening the slowdown in housing, investment and consumer spending. The latest expectations data give policymakers a reason to stay cautious. Consumers still expect inflation above target, and businesses still see enough cost pressure to keep price-setting decisions under scrutiny.

The Bigger Risk Is Confidence, Not Just Prices

Inflation is partly about numbers, but it is also about trust. Canadians may understand that the inflation rate is lower than the peak reached in 2022, yet many households are still comparing today’s prices with what they paid several years ago. That gap between official progress and lived affordability is why expectations can remain elevated even when some core measures look more controlled.

Tariffs make that confidence problem harder to solve because they are tied to political decisions and trade negotiations rather than normal domestic demand. Consumers do not know whether tariffs will rise, fall or be removed. Businesses do not know whether supply chains will need to be redesigned again. The Bank can influence borrowing costs, but it cannot directly settle a trade fight. That leaves Canadians watching prices with one eye on Ottawa, one eye on Washington and one hand still on the household budget.

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