Data released by Statistics Canada show that the September Consumer Price Index rose 3.1% year over year and 0.1% month over month, with overall inflation once again touching the upper edge of the Bank of Canada's 1% to 3% target range. Although some core inflation measures have eased, smoothed trends still indicate that price pressures have not fully dissipated. Derek Holt, vice president at Bank of Nova Scotia (Scotiabank) Economics, noted that Bank of Canada Governor Tiff Macklem has clearly shifted toward focusing on forward-looking inflation risks and downplaying single-month lagging data, while market pricing shows the probability of a rate hike at next week's policy meeting has risen significantly.
Overall inflation returns to top of target range as energy prices become the main driver
Canada's overall CPI rose to 3.1% year over year in September, slightly accelerating from 3.0% in August, while month over month it rose 0.1% on an unadjusted basis. The result was slightly below the market consensus of 3.2%, but still at the upper edge of the central bank's target range. Energy prices were the key factor pushing up the headline reading, with gasoline prices accelerating to a 27.8% year-over-year increase, well above 22.8% in August. Food prices continued to slow, with store-bought food up only 1.7% year over year, the slowest pace since May 2024. Excluding food and energy, traditional core CPI held at 2.1% year over year, while the seasonally adjusted annualized monthly rate rose only 1.5%, the weakest reading since April. However, that slowdown was largely driven by a sharp pullback in travel services prices. In September, overall travel services prices fell 25% month over month on a seasonally adjusted annualized basis, while car rental prices dropped 38%. After stripping out these seasonal factors, core price pressures still showed signs of broader pass-through.
Smoothed core inflation trend remains warm as upside risks persist
The trimmed mean and weighted median core inflation measures closely watched by the Bank of Canada both posted a seasonally adjusted annualized monthly rate of 2.2% in September. The August weighted median was revised up by more than 0.5 percentage points, lifting its three-month moving average to 2.7%, while the trimmed mean's three-month moving average stood at 2.6%. On a year-over-year basis, the trimmed mean fell to 1.8% and the weighted median was 1.9%. Although these readings moderated, Holt stressed that such year-over-year measures react too slowly at inflation turning points, and that smoothed monthly trends better reflect true pressure. In terms of breadth, nearly 60% of the CPI basket posted year-over-year gains of 2% or more. Core goods inflation picked up somewhat, and while services inflation slowed due to drags from travel-related items, the trend remained warm after excluding travel services. Central bank staff have repeatedly underestimated risks at inflation turning points in the past, and with the policy rate still at the lower end of the neutral range and real rates negative, policy lag risks are further exacerbated.
Macklem shifts to forward guidance as market rate-hike pricing holds firm
Macklem's recent comments have clearly downplayed lagging data and instead emphasized higher forward-looking inflation forecasts and upside risks. He noted that newly released projections will show higher Canadian inflation. Markets reacted accordingly, with rate-hike pricing for next week's October 28 policy meeting holding at around 18 basis points, while Canada's two-year government bond yield performance lagged front-end rates among major economies. Holt argued that although a single month of data is not decisive, the trend already provides sufficient support for a rate hike. If a heavily priced hike ultimately fails to materialize, it could instead create greater risk by easing financial conditions. Current policy needs to hedge against potential upside commodity prices, possible fiscal expansion, and geopolitical uncertainty, especially given the long lags in policy transmission. Waiting longer could leave the central bank even further behind the evolution of inflation risks.
Editor's summary
Canada's overall inflation rose back to 3.1% in September, driven mainly by energy prices. Although some core indicators eased, smoothed month-over-month trends still show persistent price pressures. The central bank governor has clearly shifted focus toward forward-looking risks, and market pricing for a rate hike next week remains relatively firm. With the policy rate at the lower end of neutral, real rates negative, and potential commodity and fiscal pressures looming, discussion of an "insurance-style" rate hike is heating up. Going forward, close attention must be paid to whether the breadth of core inflation expands, changes in inflation expectations, and the further impact of geopolitics on energy prices. These factors will determine whether the monetary policy path turns toward tightening earlier than expected.
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