Higher energy prices drove up inflation in Canada in September, as the Iran and Russia-Ukraine wars continued to strain global refinery capacity.

The Consumer Price Index report, released by Statistics Canada on Monday, showed that overall prices rose 3.1 per cent year-over-year, up from 3 per cent in August.

The bulk of the increases stemmed from higher energy prices, which were 19 per cent higher compared with the same time last year.

Grocery store prices rose 1.7 per cent year over year in September after increasing by 2.8 per cent in August. It marked the smallest yearly increase since May 2024 and the second consecutive month where grocery price growth increased at a slower pace than the overall inflation rate. Prices declined for fresh vegetables as well as sugar and confectionary items, while the price for beef and “other food preparations” grew at a slower pace.

Shelter prices also rose 1.8 per cent year over year.

Core inflation measures, which exclude volatile components such as energy and food prices, remained stable. CPI-median dipped to 1.9 per cent in September from two per cent in August, while CPI-trim fell to 1.8 per cent in September from 1.9 per cent.

“(The report) was a touch softer than expected … 3.1 per cent is still pretty hot inflation, but core inflation measures are not showing too many signs of increasing in the short term,” said Robert Kavcic, senior economist for BMO Capital Markets, in an interview.

“One thing the Bank of Canada is keeping an eye on is just how broad inflation pressure is spreading, and that doesn’t seem to be spreading all that much either.”

Leslie Preston, managing director and senior economist at TD Bank Group, also said she was “pleasantly surprised” that the overall inflation rate was softer than expected.

“We look at measures at underlying inflation, and what that tells me that Canadians aren’t experiencing very high inflation when you strip away the effects of energy prices,” she said in an interview.

“We do expect core inflation pressures to pick up as businesses likely need to pass on some of these higher costs in their end prices.”

Monday’s data provided the last look at inflation before the Bank of Canada announces its overnight interest rate later this month.

Higher energy prices have lifted inflation past the Bank of Canada’s two per cent target since May, and the overall inflation rate sat at three per cent in July and August.

So far, central bank officials have chosen to look through the direct impact of higher oil prices on inflation and have repeatedly said they’ve seen limited evidence that higher energy costs are spreading broadly to other goods and services.

However, Bank of Canada governor Tiff Macklem told reporters in a call after an International Monetary Fund meeting in Bangkok on Saturday that “with the conflict ongoing, shipments still curtailed, and refinery capacity damage, the risk that inflation broadens and becomes more persistent has gone up.”

“Our beacon is our two per cent inflation target, and we are committed to keeping inflation close to target over time. We’re prepared to adjust monetary policy as needed.”

Economists, however, are split.

BMO Capital Markets still expects the central bank to remain on hold for the rest of the year and into 2027, but Kavcic noted that may change given Macklem’s statements over the weekend.

“It was a bit of surprise. Macklem was clearly hawkish. It’s almost like they’re determining that there’s a pretty good chance they’re just going to go ahead and raise rates in the next couple of months,” he said.

“We’re probably going to see 25 or 50 basis points of rate hikes just off the top to get the bank back to what they consider to be neutral. The timing is a bit of a question: Is there enough urgency there for them to go in October?”

TD’s Preston said that if the central bank does raise rates in October, they would have a hard time justifying it because core inflation is below the two per cent target.

TD’s forecast tables also expect the central bank to remain on hold for the rest of the year and into 2027.

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“It would be tricky for them to justify at this point, but they want to signal that they’re vigilant … I think the other thing that would contribute to them raising rates is, frankly, if the Canadian economy started doing better,” she noted.

“That would kind of be a good news story for why the Bank of Canada might need to raise rates down the line, because then they would be concerned that … domestic strength is going to push inflation pressures higher.”

• Email: ptran@postmedia.com