September Inflation Makes Bank of Canada Policy's Decision Next Week More Interesting, Says BMO

10:10 AM EDT, 10/21/2025 (MT Newswires) -- Canadian consumer prices rose 0.1% month over month in September, or a "chunky" 0.4% month over month in seasonally adjusted (SA) terms, firm enough to lift headline inflation five full ticks to 2.4% year over year, said Bank of Montreal (BMO).

The combination of tough base effects -- in other words, gasoline prices plunged a year ago -- and a monthly rise of 1-2 ticks above expectations fired up the yearly rate, noted the bank. Pump prices accounted for much of the ugly headline result -- and some of that will reverse next month -- but cores were a bit above expectations across the board and revealed some annoying stickiness.

Both of the Bank of Canada's core measures printed above 3%, with median holding at 3.2% and trim at 3.1%. It wasn't terrible news on this front, though, as almost all cores rose 0.2% month over month in SA terms, and the three-month trends are below 3%, pointed out BMO.

Notably, the oldest core measure of CPI excluding food & energy is running at a mild 1.6% annualized pace over the past three months and held steady at 2.4% year over year -- very much in line with the BoC's mantra that underlying inflation is around 2.5%. In addition, the breadth of inflation improved a bit, with 37% of prices above 3% versus 39% in August.

Food prices were a major challenge last month, rising 0.5% month over month on an adjusted basis. Groceries alone are now up 4.0% year over year, the fastest pace since late 2023 and almost double last year's advance. Meat, sweets and coffee are the big drivers there.

On the shelter side, rent remains the single biggest source of inflation, and it ticked back up to 4.8% year over year from 4.5%, partly offset by a further softening in mortgage interest costs. September is the month that tuition fees changes are recorded for the year, and this year was low-drama with these charges rising 1.7% versus 1.8% a year ago.

Markets were all braced for a pop in headline to back above 2% year over year on gasoline prices alone, but unfortunately, food inflation got hungrier as well, with a few other elements of core also nudging into the picture, added BMO. Suffice it to say, this will make the BoC's decision a bit more interesting next week than previously expected -- markets had been all but baking in a rate cut after Governor Tiff Macklem's dovish remarks and Monday's soft Business Outlook Survey (BOS).

The bank has been on the dovish side of the ledger, calling for the BoC to eventually cut the overnight rate to 2.0% -- and possibly lower if trade gets uglier -- but it wasn't convinced that October would see another cut.

Given Tuesday's setback for core, BMO will stay there for now. The biggest counterpoint is that some key measures of core are still fully consistent with the BoC's view that underlying inflation is around 2.5%.

One source of upward pressure on core inflation has been spectator entertainment charges, which have surged 10.7% year over year from 4.0% in 2024, and the fastest in more than 30 years, according to the bank.

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