Canada experienced a rise in inflation to three percent in July, driven by increased gas prices due to renewed tensions in the Middle East. Statistics Canada data revealed that gas prices surged by 25.7 percent year-over-year in July, higher than the 20.5 percent growth in June. The conflict in the Middle East, including the blockade in the Strait of Hormuz and shipping route closures in the Red Sea, exerted pressure on energy prices.
Economists had anticipated a slight increase to 2.9 percent, but the actual inflation rate of three percent exceeded expectations. In July, costs for travel tours, hotels, and flights to U.S. destinations rose, partly due to the FIFA World Cup. Additionally, higher jet fuel costs led to a 12 percent year-over-year increase in air transportation prices in July, up from 9.6 percent in June.
While some cost pressures were temporary, such as those from the World Cup, the slight decrease in gas prices in August is a positive sign. Food prices helped mitigate inflation, with inflation for food purchased from stores easing to 3.1 percent in July, down from 3.9 percent in the previous month. The deceleration was driven by slower growth in fresh vegetables, chicken, and cereal products, while inflation for fresh fruit accelerated to 6.1 percent, particularly due to soaring costs of berries and melons.
Despite favorable food price trends, grocery price inflation has surpassed the all-items consumer price index for 18 consecutive months, according to Statistics Canada. Core inflation measures, excluding volatile components like gas and food, rose slightly higher than expected in July. The consumer price index, excluding gas, increased by 2.2 percent for the third consecutive month, with CPI-trim and CPI-median also exceeding expectations.
Despite the uptick in core inflation measures, they remained within the Bank of Canada’s target range, indicating stable inflation. BMO’s Robert Kavcic noted that while there was some heat in July, the inflation situation appeared well-controlled. The Bank of Canada will consider these July inflation figures in its upcoming interest rate decision on Sept. 2. It is expected that the bank will maintain its benchmark interest rate at 2.25 percent, as core inflation measures are not expected to prompt an immediate rate hike.
Both BMO and CIBC economists predict that the Bank of Canada will keep interest rates unchanged for the remainder of the year, given the manageable core inflation levels observed in July.