- Canadian inflation rose to the highest rate in almost a decade, with the consumer price index rising 3.7% year-on-year in July, up from 3.1% in June and above the median analyst estimate of 3.4%.
- The acceleration in price growth was widespread with six of eight major categories seeing faster year-on-year growth. Shelter prices (+4.8%) contributed the most to the increase. Only clothing & footwear and alcohol, tobacco & cannabis saw price growth slow relative to a year ago.
- Seasonally adjusted price growth was up a robust 0.5% month-on-month, with similarly strong growth among most major categories.
- Two of three of the Bank of Canada’s core inflation metrics moved higher in the month. The CPI-trim rose to 3.1% (from 2.7%) and CPI-Median to 2.6% (from 2.4%). The CPI-common measure was unchanged 1.7%. Taken together, the three measures averaged 2.5%, the highest level since February 2009.
Key Implications
- Price growth continues to surprise on the upside in Canada. At the same time, it is becoming more widespread across categories. The pandemic’s effect on price growth is not only on the supply side, where production disruptions are adding to the cost of manufactured goods such as autos, but also on demand, where policy supports have driven robust spending on housing and durable goods items. We are also now starting to see the impact of faster price growth in re-opening services sectors such as restaurants.
- The staying power of inflation will ultimately depend on expectations and the response of monetary policy. The Bank of Canada may be willing to tolerate higher inflation while the economy is still re-opening and recovering from the health shock, but it will respond to more lasting price pressures by reducing monetary accommodation. In the near-term, asset purchases are likely to continue to be pared back, with rate hikes likely to follow late next year.
