Inflation ticked back above the Bank of Canada’s control range in July, but progress on underlying price pressures leaves room for policymakers to pause interest-rate hikes.
The consumer price index rose 3.3% from a year ago, the first re-acceleration since April, Statistics Canada reported yesterday in Ottawa. That was faster than the median estimate of 3% in a Bloomberg survey of economists. On a monthly basis, the index rose 0.6%, double their expectations.
The Canadian dollar reversed earlier losses after the release of the data to trade at C$1.346 per US dollar. Bonds slumped, with the yield on two-year Canada debt jumping as high as 4.831%.
The hot headline rate, however, is watered down by some easing in the core measures. Two key yearly inflation measures tracked closely by the central bank — the so-called trim and median core rates, which filter out items with extreme price fluctuations — eased, averaging 3.65% from a downwardly revised 3.7% a month earlier.
A three-month moving average of the measures that Governor Tiff Macklem has mentioned as key to his team’s thinking fell to an annualised pace of 3.49%, from an upwardly revised 3.91% previously, according to Bloomberg calculations.
“The modest slowing in core CPI is a bit of a silver lining for policymakers in a generally strong CPI report,” Benjamin Reitzes, a rates and macro strategist at Bank of Montreal, said in an email. The Bank of Canada “likely wants to move to the sidelines in September and give prior hikes time to have an impact, but the inflation figures aren’t making that an easy call.”
The numbers highlight a challenge in the current phase of the inflation fight after favourable base effects — which lent a helping hand to the deceleration in recent months — ran their course. July’s re-acceleration in the headline inflation rate was partly due to gasoline prices, which fell sharply in July 2022 and so did not have the same downward impact on the 12-month inflation number as in June.
Macklem and his officials already anticipated consumer price gains would remain near 3% for the next year, saying last month that the next stage in the decline toward the 2% target is “expected to take longer and is more uncertain.”
The latest inflation print with cooling core measures — along with recent signs of softening in the economy and labour market — may pave the way for policymakers to return to pause mode as early as their next meeting on September 6. The majority of economists expect the central bank to hold the overnight rate steady at 5% next month.
The continued above-target gains in the 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 Capital Economics, said in a report to investors. “Nonetheless, we still expect a more pronounced easing of core inflation later this year.”
This is the last of two inflation reports before that decision. The first set of data in June showed inflation slowed to within the bank’s control range for the first time since March 2021, but progress in cooling underlying pressures had essentially stalled. July’s core movements will help alleviate concerns over that setback.
On a year-over-year basis, prices for gasoline fell 12.9% in July after a 21.6% decline in June, while on a monthly basis, prices remained nearly unchanged at 0.9%.
The mortgage interest cost index posted another record year-over-year gain and remained the largest contributor to the headline rate. Excluding mortgage costs, the rate rose 2.4%.
Grocery prices grew at a slower pace year over year, rising 8.5% last month after a 9.1% increase in June.
Services inflation rose to 4.3% in July from 4.2% one month earlier.
On a monthly basis, higher prices for travel tours led the gain, with July being a peak travel month.
Regionally, prices rose at a faster pace in July compared with June in all provinces except British Columbia and Saskatchewan. Price growth accelerated the most in Prince Edward Island, largely due to a rise in energy prices.
In Nova Scotia, consumers saw gasoline prices jump 14% from a month earlier, the fastest pace in the country, primarily due to the introduction of the carbon levy and higher wholesale prices.