Current conditions

Inflation remains around 3%, pushed up by higher gasoline prices. The Canadian economy gained strength in the second quarter. Renewed trade tensions with the United States will weigh on near‑term growth.

Economic growth picked up in the second quarter of 2026. This increase was driven mainly by solid consumption and strong gains in investment and exports. The pickup in growth was stronger than expected in the July Report.

Growth is estimated to remain solid in the third quarter. It slows in the fourth quarter mainly due to new US tariffs, heightened trade policy uncertainty and tighter financial conditions.

Consumer price index (CPI) inflation has stayed close to 3% over the past six months, largely reflecting higher gasoline prices. Inflation is estimated to rise to about 3½% by the end of the year, about 1 percentage point higher than anticipated in the July Report.

Disruptions to global energy supply, higher prices of non‑energy imports and counter‑tariffs have intensified cost pressures since the July Report. Businesses expect to pass through more of these cost increases to consumers. At the same time, US tariffs and the associated uncertainty dampen demand, limiting upward pressure on inflation.

Economic activity

Gross domestic product (GDP) grew strongly in the second quarter, with gains broadening across both expenditure components and industries. This broadening provides a more solid foundation for future growth.

Activity strengthened heading into the summer

GDP rose 3.3% in the second quarter of 2026 (Chart 1). This reflected a surge in exports and solid growth in domestic demand, supported in part by temporary factors.

Despite ongoing weakness in sectors affected by tariffs, export growth began to broaden (Chart 2). Gains in the second quarter reflected a rebound in motor vehicle shipments as some production came back online, as well as strong exports of energy and other commodities, consumer goods, and machinery and equipment. These widespread gains were supported by solid US demand—including for products related to artificial intelligence (AI)—along with businesses adapting to the changing trade environment.

Despite slow population growth, consumer spending grew strongly, supported by growth in labour income and temporary government transfers.1 Housing activity rebounded but remained subdued overall.

Robust spending on machinery and equipment—including AI‑related investment—and activity in the oil and gas sector boosted business investment.

Employment is roughly unchanged since January. The private sector was a relative source of strength, adding about 87,000 jobs. Net job creation was concentrated in industries less reliant on US demand. Employment remained weak in industries highly reliant on US demand, while public sector employment fell sharply (Chart 4).2

The unemployment rate has hovered around 6.5% in recent months. Layoffs remain low, but elevated long‑term unemployment and subdued job vacancies suggest that it is more difficult than usual for the unemployed to find work.

Wage growth has been around 3% across many measures, with LFS‑Micro data somewhat lower.3 Businesses’ wage expectations are little changed and remain near 3%.

In September, energy inflation rose to 19%, driven by prices for gasoline and heating oil. This reflected a surge in crude oil prices and elevated refinery margins.

Inflation in goods excluding food and energy was 1.2%. Inflation in durable goods remained above its historical average, partly because strong AI‑related demand raised prices for digital computing equipment. Growth in the price of food in stores slowed to 1.7%.

Inflation in services excluding shelter was elevated at 3.7%, partly reflecting the pass‑through of higher fuel costs to travel‑related services. Shelter inflation was modest at 1.3%, although it has picked up slightly as downward pressure from rents and mortgage interest costs has faded.4

Cost pressures are building

Disruptions to the global supply of energy along with strong prices for non‑energy imports are raising costs for Canadian businesses. Counter‑tariffs are expected to put further upward pressure on import costs in the coming months.

Fuel costs are the main driver of cost pressures

High crude oil prices and wide refinery margins have raised gasoline and diesel prices. In September, refinery margins added the equivalent of roughly US$40 per barrel, pushing pump prices well above what crude oil prices alone would suggest (see In focus: Refinery margins and the persistence of energy inflation).

High fuel prices raise the costs of transportation, distribution and petroleum‑based inputs. These pressures are already affecting travel services and intercity transportation prices. They are also raising costs for a broad range of goods and services, including food and plastic products, as well as housing.

Non‑energy import cost pressures have also increased

Canada is also importing inflation pressures from other countries. Higher prices for non‑energy imported inputs and final goods raise costs for Canadian businesses and put upward pressure on consumer prices.

Outsized increases in import prices are concentrated in industrial inputs that rely on oil‑based raw materials, especially chemicals and plastic and rubber products. In addition, strong demand for AI‑related equipment is pushing up prices globally for semiconductors and other computer components.

Tariffs and the past depreciation of the Canadian dollar are also adding to import costs.

Cost pass‑through is expected to increase

Pass‑through from higher energy prices has so far been visible only in the prices of fuel and travel‑related services. Energy costs pass through quickly to gasoline and transportation services, while their effects on other consumer goods take longer to materialize. Higher costs for AI‑related imports have also begun to push up inflation in computers and personal electronic devices.

Indicators suggest these cost pressures will pass through to consumer prices in the coming months.

• A cost‑based indicator used to forecast near‑term inflation points to a rise in inflation in goods excluding energy as earlier cost increases work their way through to consumer prices (Chart 8).
• Surveys suggest that businesses have absorbed most of the increase in input costs so far. However, businesses expect to pass on a greater share of the increase over the next 12 months (Chart 9).

The extent and timing of the pass‑through remain uncertain and will depend on the persistence of cost pressures and the strength in consumer demand (see In focus: Using Prima to trace how an energy shock affects inflation).

Near‑term inflation expectations have risen

Expectations for near‑term inflation have risen among businesses, particularly those most exposed to energy and tariff‑related costs (Chart 10). Businesses’ longer‑term expectations remain within historical ranges. Consumers’ inflation expectations continue to be somewhat elevated.

Commodities

Energy prices have risen sharply since the July Report, while price movements for other commodities have been mixed.

Energy prices are expected to stay higher for longer

Persistent disruptions to oil supply from the Gulf region have led to a sharp increase in crude oil prices. Brent futures are higher across the projection horizon (Chart 11).

The front‑month contract is trading at about US$115 per barrel, about US$35 above its price at the time of the July Report and up US$50 since the beginning of the year.5 Moreover, the entire Brent futures curve has moved up, with the October 2027 price now about US$15 higher than it was in the July Report.

Refinery disruptions in the Middle East and Russia are keeping gasoline, diesel and jet fuel prices unusually high relative to crude oil prices (see In focus: Refinery margins and the persistence of energy inflation).

Natural gas prices in North America are close to their level at the time of the July Report. Prices in Europe and Asia have risen further amid renewed geopolitical tensions and increased demand for liquefied natural gas.

Non‑energy commodities prices are mixed

The Bank of Canada non‑energy commodity price index has remained broadly unchanged since the July Report.

Grain prices rose sharply because of dry weather in the United States and disruptions to Russian and Ukrainian exports. Copper prices recently hit record highs, supported by strong AI‑related demand and US buying ahead of potential tariffs. In contrast, prices for cattle and forestry products softened.

Financial conditions

Global financial conditions have tightened since the July Report.

Amid heightened volatility, sovereign bond yields have risen across advanced economies, reflecting higher expected policy interest rates and higher term premiums. Yields in Canada have also increased but by less than in the United States (Chart 12). Term premiums have risen for a variety of reasons, including because private investors require greater compensation to absorb increases in government and corporate issuance (see In focus: Factors behind the rise in long‑term sovereign bond yields).

Equity markets have been volatile since the July Report. After many reached all‑time highs, equity markets have pulled back in part due to investor concerns about the sustainability of earnings growth in the AI sector. These concerns have also been an important factor in the widening of credit spreads.

The Canadian dollar weakened somewhat due to the strength of the US dollar but has since recovered to around 71 cents—the same as assumed in the July Report.