Consumer price inflation lost a bit of steam in July, but was still high – up 7.6% year-on-year (y/y). It was a step in the right direction though, losing a bit of steam from an 8.1% y/y pace in June.
Lower gasoline prices held down inflation in July, with prices falling 9.2% on the month – the largest such decline since April 2020. Gasoline prices are still 35.6% higher than a year ago.
Energy is not the whole story on inflation. Prices ex-energy were still up 6.6% y/y in July on broad based price pressures. Food inflation in particular heated up last month, with prices up 9.9% y/y, accelerating from 9.4% in June.
Prices for various travel-related services continued to increase as Canadians take long delayed vacations. Airfares rose 25.5% month-over-month (m/m), traveller accommodation prices were up 47.7% y/y in July and restaurant meals were up 7.3% y/y.
In contrast, shelter inflation slowed marginally to 7.0% y/y from 7.1% y/y in June. Overall services inflation is running at 5.7% y/y.
Seasonally adjusted, month-on-month headline CPI rose 0.3% following a 0.6% gain in June – and the smallest monthly gain since December 2021. CPI ex-food and energy was up 0.5% m/m, a relatively hot reading.
The Bank of Canada’s core inflation metrics were mixed in July. CPI-trim decelerated by 0.1 percentage points (pps) to 5.4%, however CPI-common accelerated by 0.2 pps to 5.5%, and CPI-median picked up two ticks to 5.0%. Averaging the three measures core inflation was 5.3% y/y, up a tenth from 5.2% y/y in June.
Key Implications
It is encouraging that headline inflation moved in the right direction in July, but underlying measures of inflation actually gained a step in July, and running above a 5% pace suggests the Bank of Canada (BoC) still has some work to do in bringing down inflationary pressures in the economy.
We expect the BoC to continue hiking its policy rate at an aggressive clip at it’s next announcement in three weeks. We currently expect a 50 basis point hike, but it appears market odds tipped a bit more towards a larger 75 basis point move, likely focusing on the lack of progress in core inflation measures.
