The Bank of Canada is heading into its Oct. 28 interest rate decision with a more uncomfortable inflation outlook, after Governor Tiff Macklem warned that high crude oil and petroleum-product prices are likely to push the central bank’s next inflation forecast higher.
In comments reported by Reuters from a Bank media roundtable on Oct. 17, Macklem said the risk that inflation becomes broader and more persistent has increased because the Middle East conflict is still affecting shipments and refinery capacity. The Bank’s next Monetary Policy Report is scheduled for release with the Oct. 28 rate announcement.
The latest inflation data shows a split picture
Statistics Canada reported on Oct. 19 that the Consumer Price Index rose 3.1% year over year in September, after a 3.0% increase in August. That put headline inflation just above the top of the Bank’s 1% to 3% control range, whose midpoint target is 2%.
But the details were less one-sided. Gasoline prices rose 27.8% year over year in September, while energy prices rose 19.0%. At the same time, CPI excluding gasoline eased to 2.2% from 2.4%. The Bank’s preferred core measures also cooled: CPI-trim fell to 1.8%, CPI-median fell to 1.9%, and CPI-common eased to 2.4%.
That split matters. Headline inflation is being pulled higher by energy, but the preferred core measures do not yet show a broad acceleration. A central bank can sometimes look through an energy shock. It becomes harder to do that if fuel and tariff costs start showing up across more prices.
Fuel costs are hitting some households harder
The pressure is not evenly spread. Statistics Canada said fuel oil and other fuels rose 57.8% year over year in September, after a 43.7% increase in August. The agency said the increase had a greater effect in Atlantic Canada, where fuel oil is more widely used.
Other categories were less severe. Grocery prices rose 1.7% year over year, the smallest annual increase since May 2024, although grocery prices were still 33.0% higher than in September 2020. Shelter prices rose 1.8% year over year, while rent rose 2.8%.
Survey evidence raises the persistence concern
The Bank’s third-quarter Business Outlook Survey, released Oct. 19, showed overall business sentiment improved after weakening in the prior quarter. The survey was conducted from Aug. 6 to Sept. 2, and about three-quarters of interviews took place before Canada-U.S. trade talks broke down and new Canadian counter-tariffs were announced.
Even so, the survey showed price pressure had not disappeared. Firms’ expectations for input and selling price growth moderated but remained elevated, often because of high global oil prices and trade tensions. Firms facing larger-than-normal cost increases said they planned to continue passing those costs on to customers.
The responses collected after the Canada-U.S. trade talks broke down were more troubling. The Bank said new U.S. tariffs and Canadian counter-tariffs were weighing on firms’ outlooks, while inflation expectations rose alongside the new tariffs and the rebound in energy prices.
Consumers also showed signs of concern. In the Bank’s Canadian Survey of Consumer Expectations, long-term inflation expectations rose to match elevated shorter-term expectations. The survey data page showed five-year inflation expectations rising to 3.91% in the third quarter from 3.39% in the second quarter. One-year expectations were 4.03%, and two-year expectations were 3.88%.
Consumer spending intentions also deteriorated from already weak levels. The Bank said high prices and economic uncertainty continued to weigh on consumers, with many respondents reporting more cautious spending and weaker intentions to make major purchases.
The rate decision is now a persistence call
The Bank held its overnight rate target at 2.25% on Sept. 2. In its summary of that decision, the Bank said inflation risks from persistently high energy prices had increased, but there was still little evidence at that time that higher gasoline prices were passing through to other goods and services.
Macklem made a similar point in a Sept. 21 speech in Halifax. He said the Bank had been looking through the direct impact of higher oil prices because there had not been much evidence of those costs spreading. He also said the Bank did not want to raise rates and restrain growth if inflation pressures were contained, but did not want to respond too slowly if pressures were becoming more persistent.
Macklem’s warning does not mean a rate increase is settled. A rate hike can cool demand, but it cannot produce oil or lower global fuel prices. Holding steady avoids adding pressure to a trade-exposed economy, but it carries risk if inflation expectations and business pass-through keep rising.
What the October report will need to clarify
The Oct. 28 Monetary Policy Report will need to answer several questions that now carry more weight than the headline CPI number alone.
- How much of the forecast revision comes from oil: A forecast driven mostly by gasoline is different from one driven by wider pass-through.
- Whether core measures are still cooling: September’s CPI-trim and CPI-median readings support the case that underlying pressure remains contained.
- Whether expectations are becoming less anchored: The consumer survey showed five-year inflation expectations rising, which is harder for policymakers to dismiss than a single monthly gasoline move.
- How trade tensions affect both growth and prices: Tariffs can weaken activity while lifting costs, a difficult mix for rate setting.
For Canadian businesses, the practical consequence is that pricing, financing and demand assumptions may need wider error margins until the new Monetary Policy Report clarifies the Bank’s forecast.
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