(Adds details from report, background)
By David Ljunggren
OTTAWA, Oct 18 (Reuters) - Canadian companies anticipate stronger demand as the COVID-19 pandemic fades, but many say supply constraints will limit sales and put upward pressure on costs, a regular Bank of Canada survey said on Monday.
The central bank's Business Outlook Survey Indicator reached its highest level on record in the third quarter survey, hitting 4.71 from the 3.96 in the second quarter.
"Positive business sentiment is common across regions and sectors. Most firms continue to anticipate healthy growth in both domestic and foreign demand ... particularly (from) the United States," said the survey.
More firms are facing supply-side challenges such as labor shortages, it added. Supply chain disruptions are more prevalent, and many businesses expect they will continue until the second half of 2022.
"Businesses see these constraints affecting their sales and cost structures. A growing number of respondents plan to increase wages to address challenges in attracting and retaining labor," it said.
"Firms intend to continue passing increases in labor and other input costs on to their customers," it said.
Around 45% of the firms surveyed said they expected inflation to be higher than 3% over the next two years, with half seeing the drivers of that inflation as temporary.
Bank of Canada Governor Tiff Macklem last week said supply chain bottlenecks were not easing as quickly as expected, meaning inflation would take a little longer to come down. The annual inflation rate hit an 18-year-high of 4.1% in August, far above the bank's 2% target.
A separate central bank survey of consumer expectations said Canadians forecast that inflation over the next year would hit 3.72%. This is a record high for the survey.
The traditional business survey of about 100 firms was conducted from Aug. 20 to Sept. 16. (Reporting by David Ljunggren; editing by Jonathan Oatis)