Canadian Inflation Climbs to 3.1% in September, Increasing Odds of October Interest Rate Hike

Canada’s annual pace of inflation increased to 3.1% in September, up from 3% in August. Canada’s inflation rate was in line with analysts’ predictions of 3.1%. The increase in inflation was largely due to higher energy prices because of the Iran and Russia/Ukraine wars.

Gasoline prices increased 27.8% on an annual basis in September, after jumping 22.8% in August. Tensions in the Middle East have seen crude oil prices soar to their highest level since May, with West Texas Intermediate trading north of $102 per barrel, while Brent Crude is above $110 per barrel. Excluding gas, consumer prices were up 2.2% in September.

Not everyone owns a car, but everyone must eat. Grocery prices increased 1.7% in September. On the plus side, this was down from 2.8% in August, and marked the smallest annual increase since May 2024. On the other hand, Statistics Canada noted that, despite the slight decrease, grocery prices have increased 33% since September 2020.

How Long Will Canadian Inflation Remain High?

Many Canadians want to know how long inflation will remain elevated, with all eyes on the Middle East and tariffs putting pressure on rising prices and costs. According to the Bank of Canada’s quarterly Business Outlook survey, Canadian businesses expected Canada’s inflation to remain above 3% for the next two years.

That is going to cost Canadians even more. Approximately half of Canadian firms said they expected to pass on some or all of their increased costs related to the Iran war and tariffs to consumers.

The Bank of Canada noted that many of the survey responses were taken before trade talks with the U.S. broke down in late August. Business sentiment has deteriorated even further since then, and inflation expectations have risen.

How Will September’s Inflation Data Affect Interest Rates

The September inflation reading is the Bank of Canada’s last price data before it announces its next interest rate decision on October 28.

Before the September inflation data was released on October 19, the Canada Mortgage and Housing Corporation (CMHC) said it doesn’t believe the Bank of Canada will announce an interest rate hike until the first quarter of 2027.

BMO and TD both see the Bank of Canada holding interest rates at 2.25% through 2028. Scotiabank is calling for interest rates to rise to 2.50% by the end of 2026, with CIBC forecasting interest rates to rise to 2.50% in the first quarter of 2027 and hit 2.75% by year-end.

September’s inflationary reading of 3.1% has led some economists to change their tune, with a now 75% chance that the Bank of Canada will increase interest rates by 25 basis points to 2.50% on October 28. Before September’s inflation data came out, the chance of an October interest rate hike was 50%.

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