Canada: Higher Energy Prices Drove Inflation in August

The conflict in the Middle East remained a source of inflationary pressure in August, keeping prices at the pump high (graph 1). Gasoline prices rose at 22.8% y/y compared to August 2025, slightly down from the 25.7% pace in July. Aggregate energy prices to slowed to 15.4% in August from 16.6% in the prior month. While still elevated, the pace has moderated from the 22.2% rate seen in May.

Despite the end of World Cup in July possibly leading to lower travel demand across North America, prices for travel tours posted a sharp rise in August (26.1% y/y) compared with July (15.2%). Base-year effects, higher jet fuel prices and the fading impact of weak travel demand to the United States in year-over-year calculations all contributed to the increase. Clothing provided a modest offset, dropping in August from a year earlier (-1.1%), largely driven by lower prices for men’s clothing (-2.3%) and children’s clothing (-1.9%). Moreover, prices of food purchased from stores saw its slowest advance since June 2025, at 2.8% y/y (graph 2). A deceleration in the growth of dairy product prices was largely responsible for the slowdown. 

Turning to underlying inflation, the average of the Bank of Canada’s preferred measures of core inflation—CPI median and trimmed mean—rose at the same year-over-year pace as the previous month (2.0% y/y). Meanwhile, the annualized seasonally adjusted 3‑month moving average of the Bank’s preferred measures increased from 2.0% in July to 2.2% last month (graph 3). Taken together, these measures suggest modest upward pressure on otherwise well-contained underlying inflation.

While underlying inflation remained contained in August, persistently high energy prices are driving much of headline inflation in the near-term. In addition, as stated in our research External link., renewed US tariffs are likely to dampen economic growth for the rest of the year while the introduction of Canadian retaliatory tariffs on September 8 could add more fuel to the inflationary fire. Given this uncertain context, we continue to expect the Bank of Canada to delay hikes until early 2027, although the persistence of energy- and tariff-related inflationary pressures underscores the risk of an earlier move.