Monetary Policy Report—October 2026—Canadian economy
Inflation remains above 3% through much of 2027. It then eases gradually because energy and import cost pressures take time to pass through. Growth is projected to strengthen to 2% in 2027 and 2028.
The outlook for growth is modestly higher than in the July Report. Growth in gross domestic product (GDP) in 2026 has been revised up to 1%. This reflects strength in the middle of the year, which is partially offset by weakness in the fourth quarter. Growth is expected to strengthen to average 2% in 2027 and 2028, supported by business investment and government and household spending. Exports continue to expand despite US tariffs weighing on affected sectors.
Inflation is projected to remain above 3% through much of 2027, about 1 percentage point higher than anticipated in the July Report. Elevated energy and import costs are expected to feed through into a broad range of prices. Weakened demand due to US tariffs and trade uncertainty provides only a partial offset. Inflation returns close to the 2% target by the middle of 2028.
Uncertainty about the future path of energy prices and the evolution of US trade policy remains elevated. How households and businesses will respond to these developments also remains uncertain (see the Risks section).
Economic outlook
GDP growth has been revised up to 1% in 2026 and is expected to strengthen to 2% in 2027 and 2028 (Chart 13). The rebound is supported by stronger business investment and government spending. It also reflects the fading of the unusually large drag from inventories in 2026. Consumption growth remains steady. Growth is positive across the major expenditure components over 2027 and 2028. As a result, slack in the economy is absorbed.
Rising business investment—bolstered by federal tax incentives such as the Productivity Mega Deduction—and increased adoption of artificial intelligence (AI) support production and labour productivity. Slow growth of the labour force and the impact of US tariffs on productivity growth constrain production.
Consumption growth is steady
Growth in consumption is anticipated to be just above 2¼% in 2026 (Chart 14). Consumption per person grew strongly, supported by earlier interest rate cuts and rising financial wealth.1
Consumption growth then settles around 2% on average in 2027 and 2028. Higher long‑term interest rates raise borrowing costs and weigh on consumption. This is partially offset by income gains from past improvements in Canada’s terms of trade.
Residential investment remains weak
Residential investment is projected to increase by slightly less than 1% on average in 2027 and 2028. Affordability constraints, slow population growth and rising borrowing costs weigh on demand. Higher costs for energy and imported inputs are expected to make construction more expensive, restraining building activity.
Business investment accelerates
Business investment is projected to grow by about 4% on average in 2027 and 2028 (Chart 15). It is boosted by the Productivity Mega Deduction, which substantially lowers the cost of capital for businesses. How strongly and how quickly businesses will respond to the new incentive remains uncertain.
Investment in the energy sector, greater adoption of AI, the gradual ramp‑up of projects supported by the Major Projects Office, and the diminishing effects of trade policy uncertainty provide additional support.
Government spending supports growth
Government spending is projected to grow by about 2½% on average in 2027 and 2028, reflecting increased provincial and federal spending in areas such as health, education, infrastructure and defence.
Export growth is modest
Growth in exports slows to around 1¼% in 2027 as US tariffs restrain non‑commodity exports. It then picks up in 2028 as the drag from US tariffs diminishes (Chart 16).
Non‑energy exports are supported by strong US demand. Energy exports rise over the projection as additional pipeline capacity comes online.2 However, because of the new US tariffs, the path of exports remains below its trajectory in the July Report.
Import growth slows
Import growth moderates from about 3% in 2026 to around 2% in 2027 and 2028 as the strength in domestic demand seen in the second quarter of 2026 fades. Rising foreign prices, Canadian counter‑tariffs and the past depreciation of the Canadian dollar also make imports more expensive, further restraining demand.
Inflation outlook
Consumer price index (CPI) inflation is projected to remain above 3% through the third quarter of 2027, about 1 percentage point higher than expected at the time of the July Report.
Inflation rises until the first quarter of 2027 as cost pressures from high energy prices and non‑energy imports feed through to consumer prices alongside diminishing slack. These pressures continue to spread through the economy, pushing up inflation excluding energy and keeping CPI inflation elevated in 2027. Inflation then eases gradually to close to 2% by the middle of 2028.
Cost pressures contribute to inflation
Chart 17 shows a breakdown of different business costs and their contribution to CPI inflation.3 Shocks, such as a sharp rise in oil prices, generally affect inflation through multiple cost channels. For example, the rise in energy prices shows up mainly in energy costs, but it also has a significant impact on the costs of imported non‑energy goods through supply chains.
In the projection, upward pressure on inflation comes mainly through higher oil prices stemming from a reduction in the global supply of energy and other factors that raise businesses’ costs.
- Energy costs put upward pressure on inflation into early 2027. Energy price inflation turns negative at the end of 2027, although earlier increases continue pushing up other prices as high transportation and production costs work their way through supply chains.
- Non‑energy import costs remain a source of pressure through 2027, reflecting elevated prices for industrial inputs sensitive to oil prices as well as Canadian counter‑tariffs and the past depreciation of the Canadian dollar.
Businesses initially absorbed most of these cost increases, but they are expected to pass on an increasing share over the next 12 months as excess capacity is gradually absorbed. This is consistent with what businesses report in Bank surveys (see Chart 9, panel a, in the Current conditions section). This gradual increase in pass‑through contributes to keeping inflation elevated through 2027.
Labour costs remain in line with productivity, reflecting a labour market that is close to balanced over the projection horizon, and are not a material source of upward pressure on inflation.
Elevated costs impact major CPI components differently
Because cost pressures do not affect all components of the CPI to the same extent, it is also useful to look at how each component evolves. Chart 18 shows the contributions of the five major CPI components—food, energy, goods excluding food and energy, shelter, and services excluding shelter—to year‑over‑year inflation.
Energy inflation is initially elevated and then declines
Energy inflation stays elevated into early 2027 as crude oil prices and refinery margins remain high. The suspension of the federal fuel excise tax partly offsets elevated fuel prices until it expires in April 2027.
As oil prices and refinery margins gradually decline, fuel prices ease. Energy inflation slows and turns negative at the end of 2027.
Food inflation picks up in early 2027
Food inflation picks up over 2027 as high energy and import costs move through food supply chains. Reduced global grain supplies due to deteriorating harvest prospects in several countries also add to cost pressures.
Goods inflation rises and then eases gradually
Inflation in goods excluding food and energy is expected to peak in the second half of 2027 as earlier increases in energy and import costs work their way through supply chains. Higher energy costs raise production and transportation expenses. Moreover, higher costs for non-energy inputs, Canadian counter‑tariffs and the past depreciation of the Canadian dollar push up import prices.
As the effects of past cost increases work through consumer prices and some cost pressures ease, goods inflation gradually declines (see In focus: Using Prima to trace how an energy shock affects inflation).
Inflation in services excluding shelter remains elevated
Inflation in services excluding shelter is expected to remain elevated through 2027 before gradually easing. Higher energy costs continue to put upward pressure on transportation and travel‑related services. Higher energy and import costs also raise the cost of intermediate goods and services used in the production of final services. These cost increases pass through slowly to consumer services prices.
Shelter services inflation picks up
Inflation in shelter services is projected to rise from a little over 1% at the end of 2026 to about 2% in 2027 and remain near that level in 2028. Higher energy and import costs are projected to raise the costs of housing construction and maintenance through higher prices for materials and equipment. Rising borrowing costs add further pressure to housing‑related expenses. Easing rent inflation provides some offset in 2027.
Endnotes
- 1. Consumption was also supported by government policies such as the federal government’s one-time top-up of the Canada Groceries and Essentials Benefit.[←]
- 2. Expansions of the Enbridge Mainline and Trans Mountain pipelines are expected to add a total of roughly 250,000 barrels per day of export capacity in 2027.[←]
- 3. In Chart 17, the contribution from Residual in 2026 is driven mainly by weaker‑than‑expected quarter‑over‑quarter inflation in the second quarter. This weakness shows up in subsequent quarters because the chart is expressed in year‑over‑year terms.[←]