Canadians now expect 3.91% inflation for years. The Bank of Canada just got its warning.

The Bank of Canada released the third-quarter editions of its Business Outlook Survey and Canadian Survey of Consumer Expectations on Monday at 11:30 a.m. ET — the final sentiment read before the bank's Oct. 28 rate decision. The message is mixed: firms and consumers mostly felt better about the economy through the summer, but inflation expectations are moving the wrong way, and the latest trade escalation is already darkening the outlook.

The business survey found firms' sentiment improved in the third quarter, the Bank of Canada said — but with a large caveat. Most interviews were conducted before Canada–U.S. trade talks broke down and new counter-tariffs were announced. Responses collected after the breakdown suggest renewed trade tensions are dampening firms' sentiment and their export and investment outlooks, the bank said. The new tariffs and counter-tariffs are putting upward pressure on costs, prices and inflation expectations, with several firms planning to further pass through costs to customers.

Investment intentions eased slightly but remained "robust," according to the Canadian Press's read of the release, and expectations for input and selling-price growth and for inflation eased but stayed elevated.

The consumer red flag

The consumer survey carries the sharper warning. Canadians' long-term inflation expectations rose to match elevated shorter-term expectations, the bank said — and, according to Canadian Mortgage Trends' analysis, five-year expectations jumped to 3.91 per cent, the highest since the second quarter of 2022. Expectations at all horizons moved higher after trade talks broke down, the bank said, with consumers citing trade tensions and energy prices as key sources of inflation.

Long-run expectations catching up to short-run ones is exactly the de-anchoring central banks lose sleep over: it suggests households are starting to believe today's price pressures are permanent.

Feeling richer, spending less

The surveys also painted a split-screen household economy. Consumers reported better financial health than in the previous quarter, citing gains in the value of financial assets and greater confidence in the labour market, the bank said. But their spending plans deteriorated from already-weak levels, with high prices and economic uncertainty weighing on them.

Labour-market perceptions split along two fault lines, according to Canadian Mortgage Trends: they improved among workers more exposed to trade with the United States but worsened among workers in sectors where artificial intelligence poses a higher risk of task replacement.

What it means for Oct. 28

The surveys join Monday morning's September CPI — 3.1 per cent year over year, driven by gasoline — as the last hard data before the Bank of Canada's Oct. 28 decision, with the policy rate sitting at 2.25 per cent after seven straight holds. Core measures stayed tame, which has been the bank's case for patience. These surveys are the counterweight: businesses passing costs through, consumers expecting it, and a trade shock that arrived after most respondents answered.