Key points

• Canada’s inflation rate held at 3% in August.
• Underlying, or core, inflation rate is cooperating (for now) at around 2%.
• We expect the Bank of Canada will remain on hold this year, but risks of an earlier rate hike have increased. 

No surprise

This morning’s inflation print came in as expected. The consumer price index was up 3% in August from the same month last year—matching the Bloomberg consensus.

Pumped higher

The culprit for these elevated inflation readings remains energy costs. Gasoline was up 23% year-over-year (y/y) last month—a touch slower than the 26% y/y increase in July, but still exerting a lot of upward pressure on overall costs.

Federal gas tax relief was extended earlier this month, which should partly offset continued pressure at the pumps.

It’s a lot more expensive to travel these days. Statistics Canada reports that the price for travel tours was up 26% y/y. 

Food prices high, but rise at slower rate

Food inflation has been one of the most stubborn components of inflation since 2021. Indeed, grocery prices are up 31% since January 2021—far exceeding the general price increase of 23%.

Last month, grocery prices rose at a slower rate (+2.8% y/y) than the general inflation rate for the first time since July 2024.

Seeking shelter from the inflation storm

Shelter costs have also shot up in the post-COVID period, but are exerting some much-needed downward pressure on inflation this year. The big story is that mortgage interest costs, which surged after the Bank of Canada raised rates, are now subtracting from inflation (-0.2% y/y in August). Rents are also rising at a slower rate this year, though they accelerated slightly in August.

Cooler at the core

The Bank of Canada will be somewhat reassured that energy costs—the result of the ongoing war in Iran and the blocking of the Strait of Hormuz—are not yet feeding into the underlying inflation trends.

The Bank looks closely at two ‘core’ measures—trim and median—that attempt to strip out volatile monthly movements. Both of these held at around 2% y/y last month.

For the inflation nerds, even the more timely reading (the annualized change in the three-month moving average) remained benign at 2.2% on both core measures.

Reassuring yes, but the Bank of Canada is not breathing easy. There is still a significant risk that higher energy prices will feed through the broader basket of goods and services. On our radar—diesel prices. They have skyrocketed, which raises the cost of transportation for pretty much everything. The longer this energy shock lasts, the more likely that these transportation costs will feed through to other goods like food and clothing. Further, we see counter-tariffs adding to inflation in the coming months.

Bank of Canada on hold for now, but mindful of inflation risks

The Bank is in a tricky spot. Inflation is above target, and there is risk that core inflation will also soon rise as energy prices remain elevated. Yet downside risks to economic growth have also increased, as Governor Tiff Macklem noted at the September rate meeting.

In short, raising rates would hurt a fragile economy, but lowering them could re-ignite inflation.

Hence, we expect the Bank will remain in a ‘wait and see’ hold at the October meeting. Our base case is that they hold this year and raise by 50 basis points next year. However, we now see an increased risk that the Bank moves earlier, both reflecting more hawkish language from the Bank and resurging energy prices. South of the border, odds are now tilted in favour of the U.S. Federal Reserve hiking on Wednesday.

Inflation still running hotter in Alberta

Closer to home, Alberta’s inflation rate was 3.8%—down from July’s reading of 4.2%, but still above the national rate.

The cooldown was due to slower growth in shelter and food costs. However, as in July, auto insurance costs (+25% y/y) continue to keep Alberta’s rate higher than the national average.

Answer to the previous trivia question: Scott Bessent is currently serving as Secretary of the Treasury of the United States.

Today’s trivia question: Where was the 2026 FIBA Women's Basketball World Cup held?