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Hot inflation 'blew the doors off' in July, but core measures 'good news' for BoC

Food prices have been a major driver of inflation in Canada. (GETTY)
Food prices have been a major driver of inflation in Canada. (GETTY) (Coolpicture via Getty Images)

Canada’s annual inflation rate rose to 3.3 per cent in July from a year ago, according to Statistics Canada. While the headline increase brings the Consumer Price Index (CPI) further from the Bank of Canada's target range, core inflationary measures suggest price pressures may continue to ease.

July's rise in the CPI was up from a 2.8 per cent rise in June. StatCan said on Tuesday the faster pace was mainly due to the base-year effect on gasoline prices, which declined steeply in July 2022. Excluding gasoline, the CPI rose 4.1 per cent, up from 4.0 per cent in June.

On a monthly basis, CPI increased 0.6 per cent in July. On a seasonally adjusted basis, the increase was 0.5 per cent.


Economists forecast headline inflation would rise to three percent, according to a Bloomberg survey. The acceleration in July's monthly figure doubled their expectations.

"While a reacceleration in headline CPI in July was widely anticipated, today's print blew the doors off economists' forecasts," Randall Bartlet, Desjardins' senior director of Canadian economics, wrote in a research note on Tuesday. "However, looking under the hood, there was some good news on the inflation front."

StatCan says mortgage interest costs booked another record year-over-year gain, ranking again as the largest contributor to headline inflation. Meanwhile, gasoline prices fell 12.9 per cent on an annualized basis in July.

While grocery costs remain elevated, prices climbed at a slower year-over-year pace last month, rising 8.5 per cent, versus a 9.1 per cent rise in June. The agency said the slower price growth was mainly due to cheaper fresh fruit.

The cost of electricity also rose at a faster pace in July, due in large part to a 127.8 per cent increase in Alberta prices, according to StatCan, amid high summer demand.

"It wasn't good news on the inflation front in July for Canadians," CIBC senior economist Katherine Judge wrote on Tuesday. "While base effects tied to a large drop in gasoline prices from a year ago falling out of the calculation contributed to the acceleration, prices excluding food and energy rose by a strong 0.3 per cent in seasonally adjusted terms."

As headline inflation climbed in July, two of the Bank of Canada's most closely-watch gauges, CPI-trim and median, did not reaccelerate. Those measures rose 3.6 per cent and 3.7 per cent year-over-year, respectively. That marked a 0.1 percentage point easing in trim, and flat CPI-median.

"When combined with the deceleration in the three-month annualized core inflation numbers, this reinforces our call that the Bank of Canada is likely to remain on hold at its September meeting, barring any major data surprises," Bartlet wrote.

Royal Bank of Canada economist Claire Fan also sees the central bank holding its key lending rate steady.

"The odds are still tilted towards the Bank of Canada foregoing another increase in the overnight rate in September," she wrote in a research note published on Tuesday.

However, she also notes: "The data are not yet fully suggesting that they've done enough, as inflationary pressures are proving more persistent."

Continued above-target gains in the CPI-trim and CPI-median core measures "will cause some concern for the Bank of Canada, and means it is still too early to rule out a further interest rate hike altogether," Olivia Cross, an economist at London-based Capital Economics, wrote in a report.

"Nonetheless, we still expect a more pronounced easing of core inflation later this year," she added.

CIBC's Judge says the underlying core components released on Tuesday indicate the Bank of Canada will raise its key lending rate by 25 basis points at its next meeting in September, in-line with her pervious forecast.

Last month, the Bank of Canada called for CPI to hover around three per cent for the next year, before gradually declining to its two per cent target in the middle of 2025. The bank’s latest forecast predicts a slower return to the bank's target range than previous estimates from January and April.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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