Canada Inflation Rises More Than Expected, Complicating Rate Cut Outlook

• 21 October 2025
• |
• 21:02

Canada’s inflation picked up more than anticipated in September, reigniting questions about how quickly the Bank of Canada can move forward with further interest rate cuts.

Statistics Canada reported that the consumer price index rose 0.1% on a monthly basis, defying economists’ expectations for a small decline. On an annual basis, inflation accelerated to 2.4% from 1.9% in August, exceeding the 2.2% median forecast in a Bloomberg survey.

Excluding gasoline, consumer prices climbed 2.6% year over year, suggesting that core inflation pressures remain more persistent than policymakers had hoped.

Analysts See Caution Ahead for Policymakers

The stronger data has cast doubt on whether the Bank of Canada will deliver another rate cut at its next meeting. “The upside surprise will likely make the bank more cautious,” said Charles St-Arnaud, chief economist at Alberta Central.

The acceleration in both headline and core measures was driven largely by base effects in gasoline prices, meaning that part of the increase reflects comparisons to unusually low prices a year ago. Even so, economists warn that it may complicate the central bank’s near-term outlook.

Andrew Hencic of Toronto-Dominion Bank said the data may signal “ongoing consumer resilience,” but added that one month of hotter readings doesn’t necessarily point to a renewed inflation trend.

Markets React Swiftly

Traders quickly adjusted their expectations for a rate cut next week, reducing the probability from nearly 80% to around two-thirds after the report’s release. The Canadian dollar gained against the U.S. dollar, while yields on two-year government bonds ticked higher.

The Bank of Canada cut its benchmark rate by 25 basis points to 2.5% in September – the first reduction in six months – citing weaker growth amid trade tensions with the U.S. However, recent data have left policymakers balancing soft economic activity with stubbornly firm price pressures.

Governor Tiff Macklem has described the labor market as “soft,” even after Canada added 60,400 jobs last month. That increase only partially offset the losses from the previous two months, keeping overall employment momentum subdued.

Core Gauges Run Hotter Than Expected

Two of the central bank’s preferred inflation indicators – the CPI-median and CPI-trim – both exceeded expectations in September. Their combined average reached 3.15%, while the three-month moving average rose to 2.7%, signaling lingering pressure in underlying prices.

Deputy Governor Rhys Mendes recently cautioned that investors may be overemphasizing these two core gauges, noting that a broader range of metrics places underlying inflation closer to the 2% target.

Price Gains Widespread Across Provinces

Shelter costs rose 2.6% on an annual basis, and CPI excluding food and energy stood at 2.4%. Excluding eight volatile components and indirect taxes, the index climbed 2.8%, while CPI excluding taxes accelerated to 2.9%.

All ten provinces reported faster annual inflation compared to August, with Quebec leading at 3.3%. Rent prices surged nationally by 4.8%, driven by a nearly 10% increase in Quebec, while slower rent growth in British Columbia helped temper the overall rise.

The Bank of Canada now faces a complex balancing act: inflation is edging higher just as the broader economy shows signs of fatigue. Whether policymakers see this as a temporary blip – or the start of renewed price momentum – will determine if rate cuts remain on the table before year’s end.