Box 1: The war in the Middle East is changing firms’ outlooks for prices
In March 2026, Bank of Canada staff contacted a targeted subset of recent respondents to the Business Outlook Survey (BOS) to understand how their outlook had changed since the onset of the war in the Middle East. A total of 20 firms were selected based on their having a high likelihood of being affected by the war, particularly through their reliance on fuel, fertilizers or global supply chains. The objective was not to replicate the representativeness of the BOS but to focus on the most exposed firms to better understand the channels through which the war would affect firms and the magnitude of the impacts. This box presents insights from these calls, supplemented by the results of a few targeted consultations with industry leaders and observations from the Business Leaders’ Pulse (BLP) gathered throughout March.
Some firms have already seen their input prices rise, while others expect increases ahead
Results from the March follow-up calls suggest that the war in the Middle East has prompted significant shifts in sampled firms’ outlooks. Most businesses had revised up their expectations for input prices, mentioning specifically fuel, freight, fertilizers and exchange rates.
Firms engaged in upstream segments of the value chain and those with fuel-intensive operations—namely, those in agriculture, oil and gas, some manufacturing, and transportation industries—have already experienced increases in their input prices. Fertilizer prices have risen, but a large share of farmers have the fertilizer they need for this planting season; thus, longer-term effects on pricing and operations will depend on the duration of the conflict. Industry consultations indicate that supply risks to aluminum production in the Gulf region have driven up global aluminum prices, raising costs for aluminum processors. Consultations also point to higher fuel and freight costs for consumer-facing firms.
Meanwhile, a small subset of firms positioned further along the supply chain reported that they had not yet experienced cost increases but anticipate them in the coming months as suppliers attempt to pass on increased costs.
Barriers to raising prices lead to partial pass-through of higher costs
Although expectations for higher input prices were prevalent across the 20 firms sampled, changes to selling price expectations were less common. Among firms that had already seen or anticipated higher input prices, the ability to pass on cost increases varied by sector. For example, transportation firms indicated that contracts typically include fuel price adjustment clauses. These clauses usually allow full pass-through of costs related to increasing fuel prices—or sometimes partial pass-through in cases where elevated prices are prolonged or for certain clients, for example. Many businesses in other sectors expressed concerns about their ability to pass on the costs from higher input prices. They mentioned factors such as:
- a weak demand environment
- constrained consumer budgets
- elevated industry competition
- pre-existing contracts that limit price adjustments
- limited pricing power
Some of these firms anticipate—or are already experiencing—margin compression as they absorb part or all of the increase in their costs. Others emphasized that it is too early to determine how much to pass on to customers.
Results from regular Bank surveys also show early signs that higher prices related to the war are influencing firms’ inflation expectations: firms in the BLP surveyed after the onset of the war reported higher inflation expectations than those surveyed in the preceding weeks (Chart 1-A).
