September inflation report muddies the water for the Bank of Canada

OTTAWA — Some economists say surprisingly strong September inflation figures will give the Bank of Canada pause ahead of its interest rate decision next week.

Annual inflation accelerated to 2.4 per cent last month, Statistics Canada said Tuesday. That’s a jump of half a percentage point from 1.9 per cent in August and a tick higher than economists’ expectations.

Annual changes in the price of gasoline, a monthly gain in travel tour prices and stubbornness at the grocery store were largely blamed for the inflationary surge.

The September inflation report will be the Bank of Canada’s last look at price data before the central bank’s next interest rate decision on Oct. 29.

The central bank lowered its benchmark interest rate by a quarter point to 2.5 per cent at its last decision in September.

The Bank of Canada’s preferred measures of core inflation showed some stubbornness in September, holding above the three per cent mark.

“Suffice it to say this will make the Bank of Canada’s decision a bit more interesting next week than previously expected,” said BMO chief economist Doug Porter in a note to clients Tuesday.

While Porter said he’s been on the “dovish” side of the argument — calling for lower interest rates to boost the economy — he said the latest inflation figures are not enough to convince him the Bank of Canada will cut its policy rate again so soon.

The Bank of Canada looks at core inflation figures in an attempt to strip out volatile influences on the headline inflation figures — often that means energy and food prices — but monetary policymakers have recently cast some doubt on the reliability of these metrics.

“That’s the problem. There’s no preferred measure right now, so you’ve really got to look at an average or range of different measures of core inflation,” said CIBC senior economist Andrew Grantham in an interview.

Looking at a broader array of core inflation measures, September’s underlying price pressures seemed generally in line with August’s readings, Grantham said.

He argued that means there was less inflationary pressure to worry about than the headline figure might suggest, setting the Bank of Canada up for a quarter-point cut at its decision next week.

Financial markets put odds of a rate cut next week at 86 per cent as of noon Tuesday, up from roughly 76 per cent the day before, according to LSEG Data & Analytics.

Grantham said the balance of economic data should be telling the central bank that the economy is likely to rebound from its second quarter contraction, but not with any particular strength.

Despite a solid gain of 60,000 jobs keeping the unemployment rate steady at 7.1 per cent in September, Bank of Canada governor Tiff Macklem noted last week that the labour market has been soft over the course of many months.

He said the pending recovery is “not going to feel very good” and won’t erase the current slack the Bank of Canada is seeing in the economy.

“We do still think that the Bank of Canada should cut interest rates at least one more time to help accelerate, if possible, this recovery that we’re seeing develop within the Canadian economy,” Grantham said.

RBC economist Abbey Xu also pointed to tepid confidence in the Bank of Canada’s business and consumer surveys released Monday as setting the stage for another rate cut.

“A higher unemployment rate, lower business inflation expectations … and the removal of most Canadian counter-tariffs, should reinforce the BoC’s view that upside inflation risks have eased — and our base-case assumes one more reduction in the overnight rate next week,” she said in a note.

Gasoline prices continue to fall year-over-year due mainly to the removal of the consumer carbon price, though prices at the pumps were up modestly on a monthly basis in September.

With gas prices falling less year-over-year last month than in August, StatCan said that put some fuel in the headline inflation reading.

Grantham said the gas price effects were expected to drive inflation higher. What surprised him was the strength of inflation at the grocery store last month.

The cost of food bought from stores rose four per cent year over year in September, up from 3.5 per cent in August. StatCan said fresh vegetables and sugar and confectionary goods were behind much of the jump.

Annual price hikes at the grocery store have largely trended higher since a recent low in April 2024, StatCan noted. Short supplies of beef and coffee are persistent factors fuelling higher prices, the agency said.

Grantham said some weakness in the Canadian dollar could be pushing prices higher on imported food.

Economists have also pointed to some pressure in food inflation tied to Canada’s retaliatory tariffs on U.S. goods such as Florida orange juice. The bulk of those counter-tariffs were removed at the start of September.

“We’d actually expected that with the retaliatory tariffs being reduced, that maybe we could get a little bit of an ease in food price inflation,” Grantham said. “Hopefully that’s still to come, but we certainly didn’t see that in today’s report, unfortunately.”

On the services side of the consumer price index, StatCan said travel tours saw a rare month-over-month price gain in September as the agency pointed to higher costs for hotels tied to major events in Europe and some parts of the United States.

National rent prices accelerated to 4.8 per cent year over year in September, up from 4.5 per cent in August. Renters have seen price hikes generally decelerate in the past year with some occasional monthly volatility.

Taking some steam out of last month’s inflation figures were smaller annual increases in clothing and footwear prices.

Porter also noted the niche category of “spectator entertainment charges” surged 10.7 per cent year-over-year in September, the fastest in more than 30 years.

“Let’s just say that World Series ticket prices are not gonna help,” he said in reference to Toronto Blue Jays fans scrambling for tickets to the Fall Classic on Tuesday morning.

This report by The Canadian Press was first published Oct. 21, 2025.

Craig Lord, The Canadian Press