inflation cools beyond falling gas prices

The latest release of Consumer Price Index (CPI) data from Statistics Canada showed a decline in the overall rate of inflation in Canada last month. Headline inflation dropped to an annual rate of 1.7% in July— and remained below the Bank of Canada’s 2.0% target—from 1.9% in June. Gasoline prices once again were the biggest factor in slowing inflation, with an annual change of -16.1% last month, owing in large part to the removal of the consumer carbon tax in April.

The slowing rate of inflation in July extended beyond gasoline prices and was broad-based. Inflation excluding energy dropped to 2.6% last month (from 2.7%), while inflation excluding shelter fell to just 1.2% (from 1.5%). The shelter component of inflation did rise last month, to 3.0% from 2.9%; however, much of the increase was due to increasing rent inflation (+5.1%) within the CPI which does not match the situation on the ground where average asking rents are broadly easing in most major markets in Canada. Food inflation also rose last month, to 3.3% from 2.9%, which Statistics Canada partially attributed to unfavourable weather conditions in growing regions for foods like coffee and cocoa.

The Bank of Canada’s preferred measures of core inflation remained elevated in July, at 3.1% for CPI Median and 3.0% for CPI Trim. Both of these metrics, which strip out the most volatile components of the CPI, sit higher than the Bank would like to see, but there are indications that price growth is slowing within the measures. Price changes over the past three months have been substantially less than the past 12 months, with the 3-month annualized rate at 2.4% for both CPI Median and Trim.

The July inflation reading is a positive result, not just for Canadian consumers, but for the Bank of Canada as it seeks to keep inflation in check and balance the impacts of tariffs on both the supply and demand sides of the economy. A prediction on how the Bank will respond at its next interest rate announcement on September 17th would be premature. There are numerous upcoming data releases the Bank’s Governing Council will evaluate before making a decision, including GDP data on August 29th, the August Labour Force Survey on September 5th, and another inflation reading on September 16th. The Bank has signalled a willingness to lower its policy rate further, and the aforementioned data will provide a window into the likelihood of such an outcome.