Consumer price inflation ticked up to 3.3% on a year-on-year (y/y) basis in July, up from 2.8% in June, largely thanks to base-year effects on gasoline prices.
Even so, gasoline prices are 12.6% below year ago levels in July. But, the fact that they were 21.6% below year ago levels in June has resulted in significantly less downward pressure on headline inflation from energy prices.
Food inflation remained the highest of the eight main categories, up 7.8% y/y in July. But, the pace of increase is gradually cooling thanks to fresh fruit prices, and to a lesser extent bakery products. The cost of a typical basket of groceries has risen nearly 20% over the past two years, the largest such increase in over 40 years.
Shelter inflation heated up again to 5.1% y/y in July, from 4.8% in June. This contributed to an uptick in overall services inflation to 4.3% y/y from 4.2% y/y. Higher electricity prices lifted shelter inflation in July primarily thanks to higher prices in Alberta, as provincial rebates and the price cap ended in the spring and demand was high in the summer. Scratching beneath the surface, our measure of “supercore” inflation cooled to 2.1% y/y from 3.4% y/y in June, thanks to softer inflation for travel-related services.
The Bank of Canada’s underlying inflation measures made very little progress in July. CPI-trim eased to 3.6% y/y in July from 3.7% in June and CPI-median was unchanged at 3.7% y/y.
Key Implications
Although headline inflation moving back above to 3% is likely to catch some attention, it is what’s going on under the hood that is more concerning for the Bank of Canada. The BoC’s median and trim inflation measures continued to make progress in July, but at a glacial pace. Underlying inflation remains a long way from the 2% goal.
Domestic demand in Canada’s economy continues to hum along, and as a result we expect progress on inflation to remain disappointing through the remainder of the year. This is pushing up expectations that the BoC may pursue another rate hike in the fall months as it gathers more information on the jobs market and overall inflation. We will hear more on the Bank’s thinking when the deliberations from the July decision are released on Wednesday.
 basis in July, up from 2.8% in June, largely thanks to base-year effects on gasoline prices.){kind=link}