Canada's Steady Inflation Rate Supports Base Case for BoC Rate Stability

Canada's inflation rate held steady at 3% year-over-year in August, a sign that underlying pressures remain contained, according to Royal Bank of Canada (RBC) economist Abbey Xu. This stability in inflation supports RBC's base case that the Bank of Canada will keep interest rates unchanged through 2026 before gradually raising them in 2027.

The Consumer Price Index (CPI) excluding food and energy, as well as the Bank of Canada's CPI-trim and CPI-median measures, remain near the 2% target. This suggests that while food and energy costs are still elevated, they are easing somewhat. However, persistent oil strength could lead to a tilt in risks toward earlier tightening.

RBC's view is based on the idea that month-to-month movements in headline inflation are less important than the breadth and persistence of underlying price pressures. As long as these underlying pressures remain contained, there is limited evidence of significant second-round inflation effects from elevated energy costs.