Canada's inflation hotter than expected; grocery prices surge as rate hike looms

Ottawa released its September inflation figures on Wednesday, and the numbers landed harder than economists had braced for. The country's annual inflation rate edged down to 6.9 per cent from 7.0 per cent the month before—a modest improvement that masked a more stubborn underlying problem. Gas prices had fallen sharply, dropping 7.4 per cent from August to September, which should have provided real relief at the pump. But that single bright spot wasn't enough to offset what was happening in grocery aisles across the country.

Grocery prices climbed at their fastest pace in over four decades. Canadians were paying 11.4 per cent more for food than they had a year earlier, up from 10.8 per cent in August. This marked the tenth consecutive month in which food price increases outpaced the overall inflation rate. Statistics Canada traced the surge to a convergence of pressures: adverse weather conditions that damaged crops, the rising cost of fertilizer and natural gas, and the ongoing effects of Russia's invasion of Ukraine on global food supplies. For families already stretching budgets, the acceleration was a particular sting.

Beyond groceries, the inflation picture remained stubbornly elevated. When economists stripped out the volatile categories of food and energy, core inflation actually accelerated slightly to 5.4 per cent year-over-year, compared with August. This suggested that price pressures were broadening across the economy rather than narrowing. Douglas Porter, chief economist at BMO, put it plainly: inflation had not eased as much as anticipated, despite the welcome drop in gasoline costs. The data signaled that the central bank's work was far from finished.

Wage growth, meanwhile, continued to lag behind the pace of price increases. Average wages rose 5.2 per cent in September compared with a year earlier—solid growth by historical standards, but still trailing the 6.9 per cent headline inflation rate. For workers, this meant that paycheques were not keeping pace with the rising cost of living. The gap between wage growth and inflation was narrowing, but it remained real.

The Bank of Canada had already raised its benchmark interest rate five times in 2022, moving it from 0.25 per cent to 3.25 per cent. The central bank's strategy was to cool spending in the economy—to make borrowing more expensive and saving more attractive—in hopes of bringing inflation back down to its two per cent target. But these rate hikes took time to work through the system, and their full effects were still unfolding. In the housing market, the impact was already visible: home prices, which had peaked in February, had begun cooling as mortgage costs climbed.

With this fresh inflation data in hand, the Bank of Canada was preparing for its next rate decision the following Wednesday. Forecasters were split on the size of the increase—some expected a half-percentage-point hike, others a three-quarter-point move. Either way, another increase appeared certain. The central bank's preferred core measures of inflation, which tend to produce less volatile readings, had held steady from August, offering little comfort that the underlying trend was shifting. The question was no longer whether rates would rise again, but by how much, and whether the medicine would prove strong enough to bring inflation under control without pushing the economy into a deeper slowdown.