Canada’s headline inflation rate jumped more than expected to 2.4 per cent in September, but markets are still pricing in an interest rate cut from the

Bank of Canada next week amid a weakening economy. Even though measures of core inflation remained firm, economists said they believe the soft economic backdrop will support further easing by the central bank at its Oct. 29 policy decision.

“The economic outlook is fraught with risks, and the elevated unemployment rate reflects an economy with ample slack — something yesterday’s Business Outlook Survey reinforced,” said Toronto-Dominion Bank senior economist Andrew Hencic, in a note following Tuesday’s CPI report.

“Markets seem to agree, pricing the odds for an October cut at 69 per cent, just a smidge lower than the 77 per cent pre-release,” he added.

Economists had been expecting inflation to hit 2.2 per cent, up from 1.9 per cent in August.

The jump in September was attributed to gasoline prices falling less than they had in August, a slower year-over-year decline in travel tour prices and

accelerating grocery prices , Statistics Canada said on Tuesday . For September, CPI excluding food and energy rose by 2.4 per cent, the same as in August, while CPI excluding gasoline rose by 2.6 per cent, up from 2.4 per cent the month before.

Measures of core inflation remained elevated at above three per cent. CPI-median rose by 3.2 per cent, the same as the month before, while CPI-trim rose by 3.1 per cent, up from three per cent in August.

Stephen Brown, deputy chief economist for North America at Capital Economics, said core measures continue to look too strong for comfort, with the average monthly gain at 0.23 per cent, above the 0.17 per cent rate consistent with two per-cent inflation.

“The average annual rate was unchanged at 3.1 per cent, although the bank can take some comfort from the fact that the three-month annualized rate remains lower at 2.7 per cent, up only slightly from 2.6 per cent in August,” Brown said in a note.

In a recent speech, Bank of Canada deputy governor Rhys Mendes said markets were too focused on measures of core inflation, which the bank introduced as its preferred measures when making monetary policy decisions in 2016. Mendes said the bank now looks at a broader set of readings to determine underlying inflation, which it estimated to be around 2.5 per cent during its last policy rate decision in September.

The central bank cut its policy rate last month by 25 basis points to 2.5 per cent, amid growing concerns of a weakening economy brought on by U.S. tariffs. The decision by Prime Minister Mark Carney to lift Canada’s retaliatory tariffs on U.S. goods in August also meant there was less long-term risks to Canada’s inflation outlook, the central bank said.

Royal Bank of Canada economist Abbey Xu said another cut by the central bank next week would leave the policy rate at the lower bound of the bank’s estimated neutral range, but noted any further easing will be harder to justify given inflationary pressures.

“We expect cutting beyond that, into outright stimulative levels of interest rates, will be more difficult with inflation still sticky at an above-target rate and fiscal policy potentially ramping up as a support after the federal budget in early November,” she said, in a note.

Gasoline prices declined by 4.1 per cent in September, following a decline of 12.7 per cent the month before. This drop was largely due to a base-year effect, with prices falling by 7.1 per cent in September 2024, due to lower crude oil prices amid economic concerns in China and the United States.

Rent prices rose by 4.8 per cent, up from the 4.5 per cent increase in August. On a regional basis, Quebec reported a 9.8 per-cent increase in rent prices, reflecting rising rents in Montreal, while price increases in British Columbia grew by a moderate 1.8 per cent.

Grocery prices rose by four per cent last month, up from 3.5 per cent in August, with growth driven by increased prices for fresh vegetables and sugar and confectionery items. Grocery inflation has trended upward since its recent low of 1.4 per cent in April.

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