Falling gas prices helped bring Canada’s inflation rate down in October, but new data shows core costs remain unchanged, raising challenges for small and medium-sized businesses.

Canada’s annual inflation rate dropped to 2.2% in October, according to new data released by Statistics Canada. The monthly consumer price index (CPI) report attributed the decline primarily to a sharp decrease in gasoline prices, which fell by 9.4% over the month. The drop follows a 4.1% decline in September, continuing a trend attributed to lower global crude oil prices and seasonal changes in fuel supply.

The agency noted that motorists benefited from a switch to winter gas blends and a broader decline in crude prices, which eased cost pressures at the pump. These changes significantly affected overall inflation, pulling the headline rate closer to the Bank of Canada’s 2% target.

Excluding gasoline, however, the inflation rate held steady at 2.6% in October, the same level recorded in September. This “core inflation” figure, which strips out volatile categories like fuel, is often used by economists to assess the underlying pace of price increases.

BMO chief economist Douglas Porter called the data “a tad on the disappointing side,” pointing out that lower prices for fuel and groceries were the primary drivers of the dip. “Many underlying prices ticked up,” Porter wrote in a note, adding that essential services and consumer staples continue to see gradual price increases.

Core inflation remains steady in Canada as fuel prices fall

For small and medium-sized businesses (SMBs), the report offers a mixed picture. Falling fuel prices may ease logistics and transportation costs in the short term, but other business-critical expenses rose in October. 

Statistics Canada reported that home and auto insurance prices rose across several provinces, with Alberta experiencing the steepest increases. Business owners in the province may face higher premiums for fleet, liability and property coverage. The agency also observed higher mobile plan costs, an expense category that can significantly impact businesses with remote or field-based staff.

Grocery prices, another key area for SMBs in hospitality and food services, grew at a slower pace last month. Although that moderation helped bring down the overall inflation rate, prices remain elevated and have outpaced the headline figure for nine consecutive months. Processed food categories saw slower growth, as did fresh vegetables. However, this was partially offset by increases in fresh and frozen meat products, including poultry.

Rising costs challenge Canadian small business

The Bank of Canada has signalled in recent communications that it is closely monitoring core inflation measures. Although the 2.2% headline inflation figure is close to the central bank’s target, preferred indicators of core inflation, which strip out volatile sectors and one-off policy changes, are still hovering closer to 3%.

The central bank has maintained its overnight interest rate at 2.25% following a recent 25-basis-point cut in late October. Governor Tiff Macklem recently suggested that the Bank would likely hold rates steady, provided inflation remained close to its projection. However, ongoing strength in core inflation measures means that rate cuts are unlikely in the immediate future.

For Canadian SMBs, the inflation environment remains uncertain. Falling fuel prices provide temporary relief, but rising costs in insurance, telecoms and essential goods mean operating pressures persist. SMBs, which make up over 97% of all employer businesses in Canada, often have less ability to absorb sustained cost increases compared to larger firms. “Headline inflation may be easing, but it’s not translating into real-world relief for SMBs,” says Kevin Kliman, President of Canadian Business at Employment Hero. “This moment calls for more than resilience. It demands rethinking how small businesses plan, price, and protect themselves in a cost-heavy economy. We need to stop measuring progress by averages and start focusing on what’s actually sustainable on the ground.”

Industry groups have highlighted the growing disconnect between falling headline inflation and day-to-day business costs. While fuel savings are welcome, SMBs still face challenges in managing expenses such as payroll, insurance renewals and equipment costs. In sectors like construction, logistics and hospitality, these factors can directly impact hiring decisions and pricing strategies.

The inflation trend is also raising questions about the broader economic outlook. If core inflation remains sticky and interest rates stay elevated, SMBs may delay investments or hiring plans. Some sectors may benefit from falling energy prices, but the broader cost environment remains a concern for employers.

In the coming months, all eyes will be on the Bank of Canada’s next interest rate decision and any signs of broader cost relief. For now, inflation has eased slightly, but businesses continue to face pressure across key operating costs.