Bank of Canada raises inflation outlook as growth forecast improves
Canada's inflation outlook is strengthening even as the economy enters the second half of 2026 on firmer footing. Price growth is projected to stay around 3% through much of 2027 before returning close to the 2% target by mid-2028, while uncertainty remains elevated.
Highlights
- Bank of Canada projects inflation to stay above 3% through much of 2027, significantly higher than prior forecasts, due to persistent energy costs.
- Growth forecast revised upward, with GDP expected to strengthen to 2% in both 2027 and 2028 as economic activity improves.
- Elevated oil prices, refining margins, and trade tensions with the U.S. pose key risks to inflation, despite stronger domestic activity and business investment incentives.
Updated outlook for prices and growth
As reported by Bank of Canada, inflation in Canada is projected to remain above 3% through much of 2027, materially higher than previously forecast, while the outlook for economic activity has been revised up.Consumer price pressures remain around 3%, driven in part by higher gasoline prices. The central bank says the economy gains strength in the second quarter, although renewed trade tensions with the U.S. are set to weigh on near-term growth.
Growth is projected to strengthen to 2% in both 2027 and 2028. Inflation then eases gradually as energy and import cost pressures take time to pass through the economy.
Energy costs and trade risks shape the path
Reduced oil supply from the Middle East and strains on refining capacity are pushing up inflation globally, according to the report. Oil prices and refinery margins remain elevated and are assumed to decline gradually, while higher energy prices are weighing on economic activity.Trade between Canada and the U.S. remains mostly tariff-free, but the breakdown in negotiations has led to new tariffs and increased uncertainty. The Bank of Canada says the evolution of energy prices and Canada's trade relationship with the U.S. remain the two most important risks to the inflation outlook.
The central bank also says the domestic outlook has improved somewhat because of stronger-than-expected activity, new incentives for business investment and an upward revision to population. Even so, inflation has been revised higher because of more persistent energy prices and higher non-energy import costs.
In our earlier article on the spike in crude oil shipping costs, we explained how conflict-related risks and rerouting around key chokepoints have sent tanker rates sharply higher, turning freight into a much larger share of the delivered oil price. We also noted that these added transport and insurance costs can filter through from fuel into broader consumer prices, hitting import-dependent markets and keeping inflationary pressure elevated while disruptions persist.
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