Canadian CPI climbs to 2.4% in September, muddling BoC’s next rate move
Shoppers saw little relief at the price till in September, as the rate of inflation rose to 2.4% year over year – higher than the 2.2% expected by economists, and likely complicating the Bank of Canada’s (BoC) next interest rate decision on October 29.
According to Statistics Canada, the Consumer Price Index surged from August’s reading of 1.9%, largely due to base effects at the gas pump; gasoline prices, while lower, dropped to a lesser degree than last month, at -4.1%, compared to -12.7% (with gas stripped out, the CPI rose 2.6%, following a 2.4% uptick in August).
Combined with stubborn grocery prices – which rose 4% – and rents, which accelerated to 4.8% compared to 4.5% last month, that was enough to drive the headline number higher. On a monthly basis, inflation rose by 0.1%.
However, mortgage interest costs continued to drop, coming in at 3.6%, down from 4.2% in August, and well below the peak of 30.9% back in August 2023; this reflects how mortgage rates have since steadily declined.
Will stronger inflation prolong another rate cut?
This stronger-than-expected report could spell trouble for Canada’s central bank, as it mulls over whether to slash the country’s benchmark cost of borrowing by another quarter of a percentage point this month. The BoC most recently reduced this rate – which in turn sets the prime rate and variable mortgage rates at consumer lenders – by a quarter of a percentage point on September 17, bringing it down to 2.5%.
Softening economic conditions in both Canada and the US – along with the prolonged shutdown of the US government – has led markets to expect further rate stimulus by the end of the year, pricing in an 80% chance of an October cut.
Most recently, the BoC’s quarterly Business Survey, released on October 20, revealed tariff and trade uncertainty has led to dreary sentiment among business owners; most don’t expect to hire in the short term, and are anticipating soft domestic and export sales. Markets have also been increasingly anticipating a cut after a cautionary speech made by BoC Governor Tiff Macklem in late September, in which he expressed that Canada’s trade is “under attack”.
However, given this latest crop of inflation data has surprised on the upside, it could give the BoC pause on its next cut – at least, holding off until its last rate decision of the year, on December 10. That’s because the central bank has a mandate to control the pace of price growth, aiming to keep year-over-year CPI growth within a 2% range. When prices run hot above this threshold, the Bank responds by increasing its benchmark interest rate; this makes it more expensive to borrow, thereby stemming economic activity and spending, and allowing inflation to cool. It does the opposite during times of economic struggle, slashing its rate to further boost spending.
In recent months, the economy has shown signs of slowing, particularly in the second quarter as tariff threats and uncertainty have taken their toll on exports. This queued the BoC up for its September rate cut, and the economist consensus is that more will be warranted – at least, in 2025.
Core measures of inflation remain sticky
This most recent report also showed an increase in the “core’ or underlying causes of inflation – important measures the BoC looks at to provide a true picture of how prices are evolving. This includes the CPI trim – which removes the top and bottom 20% of price volatility – as well as the CPI median, which reflects price changes in the 50th percentile. According to StatCan, the CPI Median remained unchanged (though well above the BoC’s target) at 3.2% in September, while the CPI Trim ticked up to 3.1% from 3.0% in August.
Whether or not the BoC will slash rates again next week will depend largely on their comfort level with this latest inflation report, and whether they see the sticky core numbers as signalling whether the progress seen early this summer in inflation has come to an end; there are still plenty of headwinds that could push prices higher including newly-announced tariffs, the failure of governments to re-establish CUSMA, or businesses being forced to pass costs down.
As BMO Chief Economist and Managing Director of Economics Douglas Porter put it in an economic note following the release, “We were all braced for a pop in headline to back above 2% on gasoline prices alone, but unfortunately food inflation got hungrier as well, with a few other elements of core also nudging into the picture.”
“Suffice it to say this will make the Bank of Canada's decision a bit more interesting next week than previously expected—markets had been all but baking in a rate cut after Governor Macklem's dovish remarks and yesterday's soft Business Outlook Survey. Absolutely full disclosure: We have been on the dovish side of the ledger, calling for the Bank to eventually cut the overnight rate to 2.0% (and possibly lower if trade gets uglier), but were not convinced that October would see another cut. Given today's setback for core, we'll stay there for now.”
The next Canadian Consumer Price Index Report is scheduled for November 17, 2025.
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Penelope Graham, Head of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.