Canadian inflation climbed higher than expected in September, hitting 2.4% year over year. Economists were calling for 2.2%. The Bank of Canada was hoping for something lower. Neither got what they wanted.

Statistics Canada's latest Consumer Price Index report showed inflation surged from 1.9% in August, driven largely by base effects at the gas pump and stubbornly high grocery prices. That's going to complicate the Bank of Canada's next interest rate decision, scheduled for October 29.

Markets had been pricing in an 80% chance of another rate cut this month. Now that's looking less certain.

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Gas Prices Drove the Headline Number

Gasoline prices are still down year over year, but they didn't fall as much as they did last month. September saw a 4.1% decline compared to August's 12.7% drop. That difference alone was enough to push the headline inflation number higher.

Strip out gas entirely, and inflation rose 2.6% in September, following a 2.4% increase in August. That's not great either.

On a monthly basis, inflation rose by 0.1%. Small, but still moving in the wrong direction if you're the Bank of Canada trying to get prices under control.

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Groceries and Rent Keep Climbing

Grocery prices rose 4% year over year. That's painfully high for anyone doing their weekly shop. Food inflation was supposed to be cooling. Instead, it got hungrier.

Rents accelerated to 4.8% compared to 4.5% last month. For renters already stretched thin, that's another hit to the budget.

The only bright spot? Mortgage interest costs continued to drop, coming in at 3.6%, down from 4.2% in August. That's a massive improvement from the peak of 30.9% back in August 2023. It reflects how mortgage rates have steadily declined as the Bank of Canada cut its benchmark rate multiple times this year.

But lower mortgage costs aren't enough to offset rising prices everywhere else.

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The Bank of Canada Was Ready to Cut Again

The Bank of Canada most recently reduced its benchmark rate by a quarter of a percentage point on September 17, bringing it down to 2.5%. That rate sets the prime rate and variable mortgage rates at consumer lenders, so when it moves, borrowers feel it.

Markets were expecting another cut on October 29. Softening economic conditions in both Canada and the US, combined with the prolonged shutdown of the US government, had everyone anticipating further rate stimulus by year's end.

The Bank of Canada'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. They're anticipating soft domestic and export sales.

And BoC Governor Tiff Macklem gave a cautionary speech in late September where he said Canada's trade is "under attack." That set the stage for more rate cuts.

Then September's inflation data came in hotter than expected. Now the Bank has a decision to make.

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Why This Inflation Report Matters

The Bank of Canada has a mandate to control the pace of price growth. They aim to keep year-over-year CPI growth within a 2% range. When prices run hot above that threshold, the Bank responds by increasing its benchmark interest rate. Higher rates make it more expensive to borrow, which slows economic activity, reduces spending, and allows inflation to cool.

When the economy struggles, the Bank does the opposite. It slashes rates to boost spending and stimulate growth.

Right now, the economy is showing signs of slowing. The second quarter took a hit as tariff threats and uncertainty weighed on exports. That queued the Bank up for its September rate cut, and economists broadly agree more cuts will be warranted, at least through 2025.

But inflation coming in above expectations throws a wrench in that plan. If prices are rising faster than anticipated, the Bank might pause to see if this is a temporary blip or a more persistent problem.

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Core Inflation Measures Are Still Sticky

The Bank of Canada doesn't just look at headline inflation. They also track core measures, which strip out volatile price swings to give a clearer picture of underlying inflation trends.

The CPI Median, which reflects price changes in the 50th percentile, remained unchanged at 3.2% in September. That's well above the Bank's 2% target.

The CPI Trim, which removes the top and bottom 20% of price volatility, ticked up to 3.1% from 3.0% in August.

Both of those numbers are sticky. They're not coming down quickly, and that's a concern. It suggests the progress the Bank saw earlier this summer might be stalling.

BMO Chief Economist Douglas Porter summed it up bluntly 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."

Porter added that his firm had been calling for the Bank to eventually cut the overnight rate to 2.0%, and possibly lower if trade gets uglier, but they weren't convinced October would see another cut. Given the setback in core inflation, they're holding that position.

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What Happens Next?

The Bank of Canada meets on October 29 to decide whether to cut rates again. Before this inflation report, it seemed like a done deal. Now it's a genuine question.

If the Bank cuts anyway, it signals they're more worried about economic weakness than inflation. They're betting this uptick in prices is temporary, driven by base effects and volatile components like gas and food.

If they hold rates steady, it means they're taking the inflation threat seriously. They're willing to wait and see if core measures continue creeping higher before committing to more stimulus.

There are still plenty of headwinds that could push prices higher. Newly announced tariffs, the failure of governments to re-establish CUSMA, businesses being forced to pass costs down to consumers. All of that creates uncertainty.

The next Consumer Price Index report is scheduled for November 17. That will give the Bank more data to work with before its final rate decision of the year on December 10.

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What This Means for Mortgage Holders

If you're on a variable rate mortgage, you were probably hoping for another rate cut this month. That would have brought your payment down again, giving you more breathing room in your budget.

Now there's a real chance the Bank holds rates steady. That doesn't mean your rate goes up. It just means it doesn't go down as quickly as you'd hoped.

Fixed rate mortgage holders aren't directly impacted by the Bank's decisions, but the overall rate environment still matters. If inflation stays elevated, bond yields could rise, which would put upward pressure on fixed mortgage rates when it's time to renew.

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The Bigger Picture

Inflation was supposed to be under control. The Bank of Canada had been cutting rates, confident that price growth was cooling toward their 2% target. The economy was slowing, trade uncertainty was mounting, and stimulus seemed like the right move.

Then September's numbers came in hot. Grocery prices climbed. Rent accelerated. Core inflation measures stayed sticky. And suddenly, the path forward isn't as clear.

The Bank has to balance two risks. Cut too aggressively, and inflation could reaccelerate. Hold too long, and the economy could slide into something worse.

Right now, they're caught in the middle. And October 29 is going to be a more interesting decision than anyone expected a week ago.