Canadian headline inflation held at 3.0 percent year over year in August, unchanged from July, according to Statistics Canada. On its own, a flat headline reading sounds like a Bank of Canada problem that is not getting worse. The composition underneath says otherwise: inflation excluding gasoline rose to 2.4 percent in August, up from 2.2 percent in July, meaning the underlying pressure the Bank actually watches most closely accelerated even while the number that makes headlines did not move.
Gasoline itself is up 22.8 percent year over year, the direct pass-through from the oil price the Geopolitical Desk is tracking today: the tanker exchanges between the United States and Iran in the Strait of Hormuz that pushed crude toward 100 dollars a barrel earlier this month. Transportation costs overall rose 7.5 percent. Grocery price growth, by contrast, decelerated for the first time since July 2024, with dairy prices up just 0.7 percent year over year against 3.1 percent in July. The headline number is flat because a war-driven spike in one category is roughly offsetting a genuine cooling in another.
Why the Bank Held Anyway
The Bank of Canada held its policy rate at 2.25 percent on September 2, pointing to a broadening economic recovery, Q2 GDP growth of 3.3 percent, and improving labour market conditions. Governing Council explicitly flagged upside inflation risk from two sources: the ongoing Middle East conflict sustaining elevated oil prices, and the tariff exchange between Canada and the United States, which imposed 50 percent tariffs on roughly 20 billion dollars of Canadian exports in August and drew a retaliatory Canadian response in September. Both risks showed up in the August data within two weeks of the decision.
Two weeks after that hold, the U.S. Federal Reserve raised its own policy rate for the first time since 2023, with Chair Kevin Warsh having warned at Jackson Hole in late August that the Fed had work to do on inflation. The Bank of Canada is now holding while its U.S. counterpart is hiking, a divergence that shows up immediately in the bond market rather than waiting for the next scheduled decision.
The Yield Curve Is Not Waiting for October 28
The Government of Canada five-year yield, the rate that underlies most fixed mortgage pricing, closed at 3.60 percent on September 18. It sat at 3.22 percent as recently as August 25. The climb accelerated visibly in the days around both central bank decisions, then eased slightly in the days after the Fed move as markets digested how far the divergence might actually run.
For any household renewing a fixed-rate mortgage over the next year, this is the number that matters more than either policy rate directly. A five-year yield forty basis points higher than where it sat a month ago changes the renewal math before the Bank of Canada makes another announcement at all.
The chart below traces the daily path of the five-year yield from late August through the Bank of Canada hold and the Federal Reserve hike, and shows how much of the total move happened in the ten days spanning both decisions.
The yield eased slightly in the two sessions after the Federal Reserve decision as markets reassessed how far the rate gap between the two central banks is likely to widen.
What October 28 Now Has to Answer
The Bank of Canada set its next decision for October 28 and said it would assess the sustainability of the recovery and the inflation outlook, with explicit room to adjust policy as tariff and Middle East pressures evolve. Between now and then, the data the Bank will be watching is exactly the split seen in August: a flat headline number built from an energy shock that has nothing to do with monetary policy, and a core measure that is drifting toward levels that would normally argue for less patience, not more.