In July, a rebound in gas prices caused the annual inflation rate to rise to three percent, despite indications that cost pressures at grocery stores were easing, according to Statistics Canada released on Monday. This increase follows a slight decline in inflation to 2.8 percent in June. Economists had anticipated a modest uptick to 2.9 percent ahead of the release.
Once again, fluctuations in gasoline prices were the main factor influencing the consumer price index (CPI). Progress in peace talks between the United States and Iran had previously lowered energy prices, significantly reducing inflation in June. However, renewed tensions in the Middle East last month led to an increase in global oil prices.
When excluding gasoline, the consumer price index experienced an increase of 2.2 percent in July, marking the third consecutive month of such growth. Higher jet fuel prices were a contributing factor, leading to a 12 percent increase in airfare costs last month, a rise from the 9.6 percent increase observed in June. Additionally, travel tour costs surged, attributed to more expensive hotels and flights to U.S. cities hosting FIFA World Cup games.
BMO senior economist Robert Kavcic noted that with the World Cup concluded and gas prices expected to decline in early August, the upcoming price data for this month would likely reflect some easing of these cost pressures.
Despite these increases, shoppers found some relief at grocery stores, where inflation for food items cooled to 3.1 percent in July, down from 3.9 percent in June. This decline was driven by slowing price increases for fresh vegetables and chicken products, along with lower prices for cereal items. However, inflation for fresh fruits rose sharply to 6.1 percent, up significantly from 1.7 percent previously, as prices for berries and melons increased.
Even with the slowdown in grocery price inflation, it has now exceeded the overall consumer price index for 18 consecutive months. The inflation figures from July represent the Bank of Canada's final analysis before its upcoming interest rate decision scheduled for September 2. To date, the central bank has maintained its benchmark interest rate at 2.25 percent over six consecutive decisions.
Kavcic pointed out persistent firmness in the Bank of Canada’s preferred core inflation indicators last month. While some shorter-term inflation measures have risen, long-run annual rates remain close to the central bank's target of two percent. With robust recent reports on gross domestic product (GDP) and employment, coupled with an approaching August 19 deadline for new U.S. tariffs, BMO remains confident in its forecast of the central bank maintaining the status quo for the next month and throughout 2026.
Echoing Kavcic's views, CIBC senior economist Andrew Grantham emphasized that July's core inflation measures are sufficiently tame, suggesting that the Bank of Canada need not rush into raising the benchmark interest rate due to price pressures. Grantham noted that policymakers have ample time to assess how fluctuations in oil prices and trade tariffs will unfold, allowing them to better evaluate whether any signs of economic recovery will persist in the coming months.
CIBC anticipates no changes to the benchmark interest rate until mid-2027, reflecting a cautious approach amidst ongoing economic uncertainties.
