Higher fuel prices continue to keep inflation in Canada elevated.

Consumer prices in Canada rose 3% in July compared to the same month last year - an acceleration from the 2.8% pace in June. 

Main takeaway: An uptick in inflation was expected in July given higher gasoline prices. On its own, today’s inflation reading won’t be enough to force the Bank of Canada to hike in September. We expect the Bank to remain on hold this year (more on this below) before looking to hike next year.  

Digging into the details:

- Pump prices were the main culprit: excluding gasoline from the basket, inflation was a milder 2.2% year-over-year (y/y) - unchanged from June.

- Grocery prices are still rising faster than overall inflation, but decelerated to 3.1% y/y vs 3.5% in June. 

- Shelter is helping to soften the overall inflation readings, reflecting the lagged impacts of a cooler housing market. This cannot be overlooked, as housing was a major source of inflation in the post-pandemic era. Shelter costs rose at a slower 1.3% y/y rate last month aided by lower mortgage interest costs (-0.3% y/y) and slowing rent pressure (+2.5% y/y - the smallest increase since November 2021). 

- The Bank of Canada will take some comfort in the core inflation prints - which attempt to strip out the volatility and capture underlying prices. Two measures closely tracked by the Bank - trim and median - rose by 1.9% y/y and 2% y/y, respectively.

In Alberta,  inflation ticked up to 4.2% y/y in July - exceeding the national pace. Transportation costs were primarily responsible for keeping inflation above the national average, driven mainly by higher vehicle insurance premiums (+29% y/y). Elsewhere in the basket, food and shelter costs rose slightly faster than the national rate.

Implications 

Cost of living remains a big challenge in Canada. Just when inflation was starting to cooperate, the war in Iran reignited cost pressures. So far, consumers have been resilient with their spending, but we think further gains will be harder to achieve. As we’ve long argued, economic growth will need to come from other sources in Canada - namely business investment and exports.

We don’t think this report will be enough to pull the Bank of Canada off the rate holding sidelines. Underlying inflation remains near target, and this latest CPI report provides little incentive for the BoC to panic and resume interest rate hikes.

The Bank faces a tricky balancing act - weighing tepid economic growth against elevated inflation. It’s true that Canadian growth has improved, but one stronger quarter (in Q2) does not constitute a trend. The Bank will need more evidence that growth is really back, especially in the face of looming tariff pressures. Raising rates too soon would slow the economy just when it’s finding its legs. On the inflation side, there isn’t enough evidence (yet) that higher energy prices are spilling over to the broader basket of goods. But the longer the conflict continues, the more energy price pass-through becomes a risk.

Hence, the default is a ‘wait and see’ hold, with a close eye on the Middle East and U.S.-Canada trade tensions. 

Answer to the previous trivia question: The last time the U.S. intervened to support the yen was July 31, 2026; prior to that, the U.S. was involved in yen intervention in 2011 following devastating earthquakes and in June 1998 during the Asian financial crisis.

Today’s trivia question: Which measure in 2022 did the Bank of Canada abandon as one of its preferred gauges of core inflation?