Economists are closely monitoring whether rising energy costs will drive broader inflation, potentially prolonging high price levels and prompting further interest rate hikes. LJ Valencia of Desjardins Economics anticipates October inflation to match or exceed September's figures, warning that businesses may soon pass on higher energy costs to consumers. However, CIBC Capital Markets economists Avery Shenfeld and Helen Lao argue that businesses might absorb these costs rather than risk hurting demand with higher prices, suggesting inflation may not escalate as much as expected.
The Bank of Canada projects inflation will stay above three percent through much of 2027, aiming to keep it at two percent. On Oct. 28, the bank raised its key interest rate to 2.5 percent, its first increase in over three years, citing concerns over energy-driven inflation. RBC economist Salim Zanzana notes that energy price impacts vary across Canada, with Atlantic Canada hit harder due to reliance on home heating oil, while inflation remains lower in Ontario and British Columbia.
Zanzana warns that higher interest rates could exacerbate economic challenges in regions where inflation is less problematic. The Bank of Canada's decisions on interest rates will significantly influence mortgage payments, consumer spending, and business investments moving forward.