Canada's inflation rate is anticipated to remain elevated when new figures are released next week, but economists hold differing opinions on whether increasing energy costs will lead to broader price rises. Statistics Canada is set to release its October consumer price index report on Monday, which tracks changes in the costs of goods and services typically purchased by Canadian households. This report provides a crucial overview of how pricing dynamics affect consumers' purchasing power.
The annual inflation rate surged to 3.1 percent in September, driven primarily by rising gasoline prices amidst ongoing conflict in the Middle East. Economists are now grappling with the significant question of not just how high inflation will rise but whether escalating energy costs will catalyze price increases throughout the economy. This scenario could maintain inflation at elevated levels for a longer period and potentially lead to further increases in interest rates.
LJ Valencia, an economist from Desjardins Economics, shares the concern that persistently high energy prices may exert upward pressure on overall pricing. He predicts that October's inflation figures will be "similar or perhaps slightly higher" than those recorded in September. Valencia points out that while businesses have thus far absorbed rising energy costs, their capacity to continue doing so is finite. He warns, "At some point, they’re going to start passing on these higher costs to consumers."
Conversely, CIBC Capital Markets offers a different perspective, suggesting that increased business costs might not necessarily translate to higher consumer prices. In a recent client note, economists Avery Shenfeld and Helen Lao acknowledged that manufacturers, wholesalers, and retailers are contending with sharply increased input costs. However, they argue that if these businesses pass on costs to consumers, the resulting "sticker shock" could dampen demand, compelling businesses to reduce prices once again to maintain sales.
They also indicate that weak consumer demand, coupled with relatively healthy profit margins among wholesalers and retailers, means that "those margins, rather than consumers, will bear a significant share of the burden of higher costs." As a consequence, they suggest that inflation may not escalate to the levels anticipated by the Bank of Canada, reducing the urgency for further interest rate hikes.
The Bank of Canada projects that inflation will remain above 3 percent for much of 2027. The central bank aims to maintain a 2 percent inflation target, situated in the midpoint of its target range of 1 to 3 percent. To manage inflationary pressure, the Bank has the option to raise interest rates to curb borrowing and spending or lower rates to stimulate economic activity during periods of weak inflation.
On October 28, the Bank of Canada raised its key interest rate by a quarter percentage point to 2.5 percent, marking its first increase in over three years due to concerns that higher energy costs could exacerbate broader inflation. As the Bank signals the potential for further rate hikes, upcoming inflation figures will be scrutinized closely for insights regarding its next moves. The decisions made by the Bank of Canada have wide-ranging effects, impacting everything from mortgage payments and consumer spending to business investments.
RBC economist Salim Zanzana highlights that while energy prices are influencing inflation, the impact is not uniform across the country. He notes that higher energy costs are particularly burdensome in Atlantic Canada, where home heating oil is predominantly utilized. In contrast, inflation rates remain relatively low in provinces like Ontario and British Columbia, where overall economic conditions are weaker. "While higher rates may help contain inflation in regions where price pressures have been more persistent, they could also compound economic challenges elsewhere where inflation is less problematic, for example in Ontario and B.C.," Zanzana adds.
