Economists expect gas prices drove inflation higher in September

OTTAWA – Economists expect a rise in pump prices in September will push inflation higher ahead of the Bank of Canada’s next interest rate decision at the end of October.

Statistics Canada is set to report inflation figures for last month on Tuesday.

A Reuters poll of economists ahead of the release predicts annual inflation rose to 2.2 per cent in September, according to LSEG Data & Analytics. Annual inflation was 1.9 per cent in August.

Stephen Brown, deputy chief North America economist at Capital Economics, said he expects the annual rate of inflation will accelerate even more, to 2.4 per cent in the upcoming release.

“We see headline inflation jumping by quite a lot,” he said in an interview.

Brown said gasoline prices were up slightly month-to-month in September but fell sharply this time last year. That will push the annual price comparison higher due to a phenomenon economists call the base-year effect.

Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO Capital Markets, said he’s also expecting the relative pain at the pumps will push inflation up but he’s calling for an increase to 2.2 per cent.

One of the factors that might take some steam out of September’s inflation reading is Ottawa’s removal of counter-tariffs on the United States at the start of the month.

But Reitzes warned the degree of price relief will vary based on how firms treat ongoing trade uncertainty.

“It’s a question of how quickly those price declines fed through and how much the initial tariffs were actually passed along in the first place,” Reitzes said. “So that dynamic will probably play out over a couple of months.”

Statistics Canada said retaliatory tariffs were driving up the prices of clothing and footwear in its June inflation report. Some economists have also pointed to food inflation — higher prices are more likely to be passed through quickly on perishable goods like groceries — as feeling the pinch of counter-tariffs.

Brown said pressures on food inflation from the relatively weak Canadian dollar earlier this year should fade in the coming months. The loonie strengthened through the first half of 2025, helping to reduce inflationary pressures on imports.

The inflation report Tuesday will be the last major economic release before the Bank of Canada’s next interest rate decision on Oct. 29.

The central bank cut its policy rate by a quarter point to 2.5 per cent in September, citing a shift in risks away from higher prices and toward a weakening economy.

Since then, Statistics Canada reported a surprising gain of 60,000 jobs in the agency’s September labour market report.

Reitzes said the central bank put a lot of weight on the few months of weak job numbers heading into the September rate decision, but the labour force survey is considered fairly volatile in economic circles.

One month of job gains doesn’t change the fact that the unemployment rate is still elevated at 7.1 per cent, he said.

The Bank of Canada will also release its own quarterly surveys of businesses and consumers on Monday, giving the central bank an update on how Canadians and employers are feeling about trade uncertainty.

Reitzes said he’s expecting a rebound in sentiment compared with the second quarter of the year when tariff disruptions were severe.

“There is ongoing uncertainty. That’s going to weigh on investment intentions, that’s going to weigh on hiring intentions. But things aren’t as bad as they were last quarter,” he said.

Reitzes said that if the inflation numbers don’t accelerate too sharply and the business outlook survey shows firms are keeping a conservative approach, another quarter-point cut could be on the table for the Bank of Canada this month.

Financial markets are placing odds of an interest rate cut on Oct. 29 at roughly 64 per cent as of late-morning Friday, according to LSEG Data & Analytics.

While Capital Economics is still pencilling in a cut, Brown said he’s a bit surprised that markets are priced for another rate reduction after the strong jobs report.

The Bank of Canada will be looking at two key factors in the week ahead, Brown said.

If the business outlook survey shows weakness in hiring intentions has spread to industries outside trade-affected sectors, that suggests there’s more room to keep cutting the policy rate.

But if the Bank of Canada’s preferred measures of core inflation show signs of accelerating in the near term, that could hold the central bank back from any more easing right now.

Bank of Canada deputy governor Rhys Mendes gave a speech earlier this month where he suggested the central bank is thinking of revising its core inflation metrics, which attempt to cut through volatile elements of the consumer price index to give a better sense of what’s happening under the hood of inflation.

The Bank of Canada has cast some doubt that its metrics of CPI-trim and CPI-median — figures that put core inflation around three per cent — are giving the best view of underlying price pressures, which the central bank has pegged closer to 2.5 per cent lately.

Reitzes said the takeaway from Mendes’ speech is not to look only at any one number.

He suggested the breadth of inflation — how many items in the basket of consumer goods are rising above the central bank’s two per cent target compared to how many are below — is a better guide to whether inflation is under control enough for the Bank of Canada to lower rates again this month.

This report by The Canadian Press was first published Oct. 17, 2025.