The annual rate of inflation fell to 1.7% in July, Statistics Canada said Tuesday (Aug. 19), down from 1.9% in June. The reading was a tenth of a percentage point below most economists’ expectations.
A 16.1% decline year-over-year in gas prices tied mainly to the removal of the consumer carbon price earlier this year fuelled the drop.
BMO chief economist Doug Porter said in an interview that the July consumer price index was a “relatively favourable report” despite some stubbornness at the grocery store and in housing.
Economists split on how July inflation may affect BoC’s next rate decision
July’s consumer price index marks the first of two looks at inflation that the Bank of Canada will get before its next interest rate decision on Sept. 17. The central bank held its policy rate steady at 2.75% in July.
The Bank of Canada has been looking for signs of how Canada’s tariff dispute is affecting inflation, and is particularly concerned with trends in core inflation that strip out influences from tax changes and other volatile inputs.
Statistics Canada said the Bank of Canada’s preferred measures of core inflation held around 3% in July.
Porter pointed out that another measure of core inflation that strips out influences from food and energy was lower in July, around 2.6%. Looking at those readings, he said the July CPI report “slightly turned the dial” toward a rate cut in September, aligning with BMO’s expectations.
Financial market odds for a quarter-point rate cut in September increased modestly to around 40% as of Tuesday afternoon, according to LSEG Data & Analytics.
But with core inflation still elevated compared with the headline figure, Porter acknowledged BMO’s call for a cut next month was “a long shot” at this point. “We need some help in the inflation numbers. We probably need a relatively sluggish jobs number as well,” he said.
CIBC senior economist Andrew Grantham said in a note that the lack of easing in core inflation can mostly be attributed to the base-year effect—the distortion from price movements last year on a particular month’s annual inflation comparisons. He said the shorter-term, three-month core inflation readings now show an annualized rate of 2.4% for July.
Grantham said there’s still more data to come before the Bank of Canada’s next rate decision, but the July inflation figures support his call for a quarter-point cut in September.
RBC, meanwhile, is maintaining its call for no more interest rate cuts from the Bank of Canada this year. Claire Fan, senior economist with RBC, said in a note that the monthly advance in core inflation was less than she was expecting. But she said pressure is still spread broadly through the consumer price index.
What contributed to July’s inflation rate?
Inflation on food from the grocery store accelerated to 3.4% annually in July, up from 2.8% in June.
Confectionary prices rose 11.8% and coffee gained 28.6% to be among the biggest contributors to food inflation last month. Statistics Canada said poor growing conditions in countries that produce cocoa and coffee beans were to blame for higher costs.
Prices for fresh grapes were up nearly 30%, driving the overall cost for fresh fruit up 3.9% in July compared with 2.1% in June.
Porter said there are some hints that Canada’s tariff dispute with the United States is a factor keeping food inflation elevated, but he stopped short of blaming it for pain at the grocery store. “I think the bigger story is coffee prices … chocolate prices and beef prices, and those aren’t really a tariff story. Those are more climate issues,” he said.
