U.S. CPI and PPI both surprised to the upside, and Governor Macklem says Canada's inflation forecast will rise significantly on Oct. 28. Energy is the common thread.

Three central-bank stories collided this week: a hotter-than-expected U.S. inflation report, a Federal Reserve that has already started raising rates, and a Bank of Canada that says its inflation forecast is heading sharply higher. The common driver is energy.

The U.S. data

The U.S. consumer price index rose 0.6% in September and 3.7% from a year earlier, up from 3.4% in August and above the 3.6% economists expected. Core CPI, which strips out food and energy, rose 0.3% on the month and 2.6% on the year, versus forecasts of 0.2% and 2.5%. Energy did much of the work, with gasoline up 9.1% on the month and roughly 35% on the year. But the core surprise was broad-based rather than driven by obvious one-off factors, according to Capital Economics. A day later, producer prices rose 1.3% on the month and 6.3% on the year, well above the 5.4% economists had expected.

A Fed that is already hiking

The Fed raised its benchmark rate by a quarter point in September, its first increase in more than three years, to a target range of 3.75% to 4.00%. Under Chair Kevin Warsh, it meets again October 27 and 28. Speaking this week, Warsh declined to say whether the Fed will hike or hold at that meeting, and futures markets trimmed the odds of an October increase to about 17%, down from the high 20s earlier in the week.

A hike by year-end is widely expected. After the CPI report, futures put the odds of at least one more increase by December above 90%, according to CNBC, and Wells Fargo's investment institute expects increases between now and spring 2027. Ten-year Treasury yields are around 5.1%, near multi-year highs.

Canada's version of the problem

The Bank of Canada's overnight rate has been 2.25% since an October 2025 cut, roughly 150 to 175 basis points below the Fed's range. Inflation here has held at 3.0% for two months, and Governor Tiff Macklem said Saturday that the Bank will raise its quarterly inflation forecast significantly when it decides on October 28. The conflict, curtailed shipments and refinery damage have raised the risk that inflation broadens and becomes more persistent, he said. The question the Bank will ask is whether inflation will come back toward 2% on its own or needs higher rates to nudge it there.

Markets are not pricing a move on October 28 or in December, but are pricing about 100 basis points of increases over the next year, according to Reuters. Two straight months of job losses have cooled the case for an immediate hike, and RBC economists expect the Bank to stay "uncomfortably on hold" through the end of 2026. Statistics Canada's September CPI and the Bank's business outlook survey, both due Monday, are the next inputs.

What it means for borrowers and businesses

Variable-rate borrowers only feel a Bank of Canada hike when it happens, but fixed-rate loans and mortgages tend to track medium-term bond yields, which can rise as soon as expectations shift. That means the borrowing-cost effect of this week's data can arrive before any official decision. Businesses with variable-rate lines of credit or term loans may want to see what an extra percentage point would do to their payments, particularly given how closely U.S. rate moves and oil prices are now driving expectations on both sides of the border.