Inflation held steady in August as Iran war surges oil prices

Economists forecast that August's inflation rate remained steady at three per cent, with gasoline prices dropping from earlier in the summer, according to a Reuters poll of economists. Statistics Canada is scheduled to release its latest consumer price index for August on Monday. Tu Nguyen, an economist at RSM Canada, stated that they anticipate the headline number not to exceed three per cent.

The rest of the economy is currently stable, according to Nguyen, as volatile gas prices throughout the spring and summer are primarily driven by Iran's war with the United States. Although hostilities in Iran were less intense in August, crude prices hovered around US$100 per barrel recently. Despite this, gas prices were still 23 per cent higher than a year ago, according to RBC economists Nathan Janzen and Abbey Xu.

The Bank of Canada maintained its key policy rate at 2.25 per cent for the seventh consecutive time earlier this month, and central bank officials have been assessing the potential impact of cost pressures from the Iran war on consumer inflation. However, the economy has largely followed the bank's forecasts, leading the governing council to keep the policy rate unchanged, according to Bank of Canada Governor Tiff Macklem.

The Bank of Canada warned in September that significant spillover from higher energy prices into broader inflation could prompt policymakers to raise interest rates, but evidence of this pass-through has been limited thus far. RBC expects the central bank to maintain its key rate steady for the rest of the year, with potential gradual hikes in 2027 depending on whether inflation remains near target and the broader recovery stays on track. The escalating trade dispute could also put upward pressure on prices in the coming months.