Canada's annual inflation rate climbed to 3.1% in September, driven largely by a spike in energy costs, according to data released by Statistics Canada on Monday. The increase comes as ongoing conflict in the Middle East pushes benchmark oil prices to their highest levels since May.

What drove the recent inflation rise?

The primary catalyst for the upward movement was a 27.8% year-over-year jump in gasoline prices. While the seasonal transition to cheaper winter gasoline blends offered some mitigation, energy costs remained a significant pressure point. Other notable shifts included:

  • Fuel oil and other fuels surged 57.8% year-over-year.
  • Shelter costs rose 1.8%, up from 1.5% in August.
  • Air transportation costs increased by 19.4%.

Is underlying inflation cooling?

While the headline figure rose, many economists suggest that core inflation—which excludes volatile items like food and energy—remains relatively stable. When gasoline is stripped from the data, consumer prices increased by only 2.2% year-over-year in September.

Grocery inflation also showed signs of cooling. Food prices rose by 1.7% compared to last year, marking the smallest annual increase since May 2024. This deceleration was supported by a 2.9% drop in the cost of fresh vegetables and lower prices for sugar and confectionery. However, the cumulative impact remains high, as grocery costs have climbed 33% since September 2020.

Economic context and regional impacts

The surge in fuel costs is not felt equally across the country. The spike in fuel oil and other fuels has particularly impacted consumers in Atlantic Canada, where many households rely on oil for heating. Additionally, shelter-related inflation was pushed higher by a 4.9% increase in mortgage insurance and a 1.2% rise in home maintenance and repair costs.

What happens next for interest rates?

The September report serves as the final piece of data for the Bank of Canada before its next interest rate decision on Oct. 28. The central bank faces a complex landscape where high energy prices threaten the inflation outlook, yet core metrics suggest broader price pressures are contained. While some market participants expect the bank to hold rates steady, others are watching for potential future hikes if energy volatility persists.