The Bank of Canada Weighs Costlier Gasoline Against Lost Jobs

A household that drives to work and carries a variable-rate mortgage is getting two signals from the Canadian economy this autumn. The pump says prices are rising. The job market says the economy is losing strength.

The Bank of Canada has to set one interest rate against both. According to the Bank's own rate history, it has held that rate at 2.25 per cent since October 2025 and holds it again, or changes it, on October 28, when it also publishes its quarterly Monetary Policy Report. Statistics Canada releases September consumer prices on October 19, nine days before.

The decision turns on a distinction the Bank draws every time energy prices jump. A price shock that starts outside the country is treated differently from inflation that runs through the whole economy. The question for October is which of the two Canada has.

Gasoline lifts the index from 2.4 to 3 per cent

Statistics Canada reported on September 14 that the consumer price index rose 3.0 per cent in the twelve months to August, the same pace as July. Gasoline prices were 22.8 per cent higher than a year earlier, according to the same release. Strip gasoline out and the index rose 2.4 per cent.

The Bank goes further than removing one item. Its two preferred core measures are built to ignore whichever prices are moving most sharply in a given month. CPI-trim drops the most extreme price changes at both ends each month and averages the rest. CPI-median takes the price change sitting in the middle of the basket.

Sources: Statistics Canada, Consumer Price Index, August 2026 (September 14, 2026); Bank of Canada, core inflation measures.

The two the Bank leans on most sit almost exactly at its 2 per cent target.

The source of the shock is outside Canada. In the summary of its September 2 deliberations, the Bank's Governing Council said shipments through the Strait of Hormuz remained curtailed and refinery margins were unusually high because of disruptions to Middle Eastern and Russian refining. Members judged that gasoline and diesel would stay expensive and headline inflation would stay "higher for longer" than the Bank had expected in July.

Why a central bank hesitates over a price it did not cause

An interest rate works by changing how much people and businesses want to borrow and spend. It does that slowly, over a year or more. It does nothing for the number of tankers leaving the Persian Gulf.

Raising rates to answer a gasoline shock would therefore cool the parts of the economy that are not causing the inflation, while the gasoline price stays where the oil and refining markets put it. That is why central banks usually describe the first jump in an energy price as something to "look through".

The exception is the second round. If businesses facing higher fuel bills start raising their own prices across the board, and workers start bargaining for wages on the expectation that 3 per cent is normal, the shock stops being about gasoline. The Bank's September deliberations named that risk directly: little evidence so far of gasoline costs passing into other goods and services, but the longer prices stay high, the more likely that becomes. Members agreed that if energy costs spilled into other parts of the index, a policy response could be needed.

The August numbers show a small movement on that front. Statistics Canada reported that CPI excluding gasoline rose to 2.4 per cent from 2.2 per cent in July, while CPI-trim and CPI-median held. Fuel oil and other fuels were up 43.7 per cent, the fastest increase in the release, and pushed inflation highest in the Atlantic provinces.

The last time an energy shock spread

The Bank has run this test before. On July 13, 2022, with energy prices high after the invasion of Ukraine, it raised its policy rate by a full percentage point to 2.5 per cent. Its statement that day reported a "broadening of price pressures" and core inflation measures between 3.9 and 5.4 per cent.

That is the difference that matters. In 2022 the core measures had already left the target band behind. In August 2026 the Bank's preferred two sat at 1.9 and 2.0 per cent.

The job market points the other way

Statistics Canada's Labour Force Survey for September, released October 9, showed employment down 68,000, after a decline of 42,000 in August. The unemployment rate rose to 6.5 per cent.

The losses were concentrated, the agency reported. Quebec lost 49,000 jobs in the month. Health care and social assistance fell by 23,000, its first monthly decline since December 2022. Young workers aged 15 to 24 lost 48,000 positions, a second straight decline.

Wages tell the Bank something too. Statistics Canada said average hourly wages rose 2.3 per cent from a year earlier, to C$37.64. A wage line running below headline inflation means households are falling behind on prices, and it also means the wage spiral the Bank worries about in an energy shock has not started.

Trade adds to the weakness. The Bank's September summary said new US tariffs cover roughly 5 per cent of Canadian goods exports to the United States after talks broke down, and that further measures were threatened. Maple's October 10 piece on US tariff refunds followed how quickly those decisions reach a Canadian company's results.

What 2.25 per cent means against these numbers

A policy rate is easier to judge once inflation is subtracted from it. The result, called the real rate, says whether money is costly or cheap after rising prices are counted.

Measured against the headline number, Canadian money is cheap. Measured against the core numbers, it is close to neutral, neither pushing the economy forward nor holding it back much. Which line the Bank uses as its guide is the whole debate.

The United States has gone the other way. The Federal Reserve announced on September 16 that it had raised its target range by a quarter point, to 3.75 to 4 per cent, saying inflation "remains elevated." The midpoint of that range sits about 1.6 percentage points above the Bank of Canada's rate.

That gap shows up in the exchange rate. The Bank of Canada's daily rate was 1.3917 Canadian dollars per US dollar on September 15, the day before the Fed's increase, and 1.4154 on October 16. A weaker loonie makes imports, gasoline among them, more expensive in Canadian dollars, which feeds back into the inflation the Bank is watching.

At the kitchen table

The rate decision reaches households through lenders' prime rates, which move with the Bank's policy rate. On a C$400,000 variable-rate mortgage balance, a change of a quarter of a percentage point changes the annual interest bill by about C$1,000. The same quarter point works the other way for savers, through what high-interest savings accounts and new GICs pay.

The pump is the other side of the household budget. A family that spent C$163 a month on gasoline a year ago would be spending about C$200 for the same litres at August's 22.8 per cent increase. A rate cut would not lower that bill, and a rate increase would not either.

Nine days between the last number and the decision

Two releases land before October 28. September consumer prices arrive on October 19, and the Bank publishes its new forecast with the decision. The Bank stated in September what it is looking for: whether the recovery holds up under US tariffs, and whether energy costs begin to show up in prices that have nothing to do with energy.

The September index will answer part of that. If CPI excluding gasoline keeps climbing and the core measures move off 2 per cent, the shock is spreading. If they hold, the pump and the job market keep pulling the Bank in opposite directions.

In August the Bank's two preferred core measures put underlying inflation near 2 per cent, and on October 28 the Bank sets its rate with September's index in hand.