Consumer Price Index Accelerated in July

In July, the Consumer Price Index (CPI) rose by 3.0 per cent year-over-year (y/y). This was higher than June’s 2.8 per cent increase.

Key insights

Canada’s CPI rose in July, in large part due to oil price increases after the reignition of conflict in the Middle East. With energy markets reeling from uncertainty, gasoline prices in Canada were 25.7 per cent higher than a year ago. Air transportation prices were also 12.0 per cent higher than at the same time last year. However, changes for other goods and services helped to moderate overall price growth. Excluding gasoline, the CPI grew by a more modest 2.2 per cent (y/y). In part due to falling rent costs, shelter price growth fell to 1.3 per cent from 1.5 per cent in June. The pace of food price growth also moderated. Grocery prices increased by 3.1 per cent—a notable deceleration from the 3.9 per cent reported last month.

Energy markets continue to play a central role in shaping near-term CPI growth. Gasoline prices have been the main contributor to upward price growth over the last several months—and will remain so until greater certainty about the future of shipping through the Strait of Hormuz is achieved. With core inflation around 2.0 per cent and food price growth cooling, the pass-through of higher energy costs doesn’t appear to be widespread. Yet, the longer that energy prices remain elevated, the higher the risk that fuel and transportation costs will pass through to other goods and services.

Over a longer horizon, trade negotiations between Canada and the United States will influence the path of price growth. The talks currently underway aim to avoid the imposition of 50 per cent U.S. tariffs on a broader range of Canadian exports, bring relief to currently tariffed sectors, and provide greater certainty for bilateral trade moving forward. However, if a favourable deal isn’t reached, consumer prices in Canada could be pulled in many directions. Weaker domestic demand stemming from job losses could pull price growth down, though weakness in the Canadian dollar could make imported goods more expensive, pushing prices higher. Potential retaliatory counter-tariffs on Canada’s part would also have a direct impact on CPI growth, likely adding to the prices consumer pay for any affected goods.

There is little urgency for the Bank of Canada to change its policy rate. While headline inflation sits at the top of the Bank’s inflation control range, the cause of the current inflationary spike is well-understood. Inflation should ease following an end to the conflict in the Middle East and a normalization of global energy flows. Core measures of inflation, which attempt to extract the underlying trend of price growth, remain modest. At the same time, economic growth has picked up. Preliminary estimates show that Canada’s real GDP posted a solid rebound in the second quarter of this year. These circumstances give the Bank ample room to sit on the sidelines. However, the risk of ongoing conflict in the Middle East, persistently elevated oil prices, and broader pass-through to other prices could change this calculus.

For more details about the impact of the shifting geopolitical landscape and our research on Canada’s place in a changing world, please read more here.