Canadian inflation saw a slight uptick in September, rising to 3.1% year-over-year from 3% in the previous two months. This increase was below the consensus estimate of 3.2% and slightly higher than RBC's pre-release expectation of 3%. The rise was primarily driven by higher energy prices, with gasoline and furnace oil costs increasing. However, food inflation continued to moderate, with grocery prices rising at their slowest pace since May 2024.
The Bank of Canada faces a delicate balance as the economy shows signs of gradual improvement but remains soft. Employment declined in both August and September, with the unemployment rate holding around 6.5%. Governor Tiff Macklem acknowledged the rising risk that elevated oil prices could lift inflation expectations or generate broader price pressures. Producer-price pressures have broadened, but these cost increases would need to persist and pass through several layers of production before affecting consumers more broadly.
RBC's base-case forecast assumes the Bank of Canada will hold the overnight rate unchanged through the remainder of 2026 before gradually raising rates in 2027. Softer labor-market data and higher fixed borrowing costs provide policymakers with room to remain patient. However, recent communication from the Bank of Canada and Governor Macklem suggests more urgency than the data might indicate, increasing the risk of preemptive rate hikes.
Key details include a 0.4% month-over-month increase in headline CPI, with energy prices up 19% year-over-year. Food inflation eased to 2.2% from 2.8% in August. The Bank of Canada's CPI-trim and CPI-median measures averaged 1.9% year-over-year. The diffusion index showed that the share of CPI components rising faster than 3% jumped to 47.8% in September.