Canada’s latest inflation reading shows a modest cooling in price growth for October, setting the stage for renewed debate about where interest rates may head next.
What Is Canada’s Inflation Rate?
Canada’s inflation rate cooled to 2.2% in October from 2.4% in September. On a monthly basis, the Consumer Price Index (CPI) rose 0.2%, or 0.1% on a seasonally adjusted basis. The CPI measures inflationary changes in prices by comparing the historical cost of a fixed basket of goods and services.
Cheaper prices at grocery stores and gasoline prices were responsible for most of October’s decline in inflation. Gas prices fell by 9.4% after dipping 4.1% in September. Food prices were up 3.4%, but this was down from the four percent increase in September.
On a monthly basis, Canada’s grocery prices were down 0.6%, which was the biggest monthly decline since September 2020, when grocery prices fell by 1.1%. With that said, grocery prices have outpaced overall inflation for the last nine consecutive months.
However, if you look more closely, the CPI showed mixed results. Excluding lower gas prices, the index climbed 2.6%, the same as in September. Excluding energy and food, October’s CPI rose 2.7%, up from 2.4% in September.
Overall, inflation came in close to expectations with various underlying measures hovering near the target range.
How Will the Inflation Reading Impact Interest Rates?
The big question is: how will Canada’s October inflation numbers impact the Bank of Canada’s interest rate policy?
In October, the Canadian central bank cut its key overnight lending rate, which directly impacts interest rates, by 25 basis points (0.25%) to 2.5%.
At the time, economists were predicting that the Bank of Canada would lower interest rates by another 25 basis points in early 2026. But the October inflation numbers put that possibility at risk. The Bank of Canada expects the headline CPI rate to be two percent in the fourth quarter, with core inflation to be at 2.9% by the end of 2025.
It all depends on who you ask, of course. TD, RBC, and CIBC think the Bank of Canada will hold its interest rate at 2.25% throughout 2026. National Bank holds that the trade war with the U.S., weak economic data, and a slow labour market could result in the Bank of Canada lowering interest rates one more time in 2026.
Scotiabank, meanwhile, thinks the Bank of Canada’s current rate-cut cycle is over, and that it could even start to raise interest rates in the back half of 2026. While a prolonged trade war with the U.S. is undermining the economy, Scotiabank thinks that inflation risks will mean the central bank will increase its policy rate by half a percentage point in the back half of 2026.
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