Sunita Somvanshi
Canada’s annual inflation rate slowed to 1.7% in July, down from 1.9% in June, driven largely by falling gasoline prices. This marks continued progress toward the Bank of Canada’s 2% target, though several key cost pressures remain stubborn beneath the headline figure.
Gas Prices Drop While Grocery and Housing Costs Climb
Gasoline prices fell 16.1% compared to July last year, continuing to reflect April’s removal of the consumer carbon levy. The drop was also influenced by lower crude oil prices following the Iran-Israel ceasefire and increased supply from OPEC+.
However, Canadians still face rising costs in critical household expenses. Food prices rose 3.3% in July, up from 2.9% in June. Grocery inflation accelerated to 3.4%, with especially sharp increases in coffee prices (28.6%) and confectionery (11.8%) due to poor growing conditions in producer regions. Fresh fruit prices rose 3.9%, with grapes surging by nearly 30%.
Shelter costs, which represent the largest component of the consumer price index, increased by 3% in July from 2.9% in June, marking the first acceleration since February 2024. Rent prices jumped 5.1%, hitting households particularly hard in Prince Edward Island, Newfoundland and Labrador, and British Columbia.
Core Inflation Remains Sticky
While the headline number looks promising, the Bank of Canada’s preferred measures of core inflation remained steady around 3% in July, indicating underlying price pressures persist. When excluding gasoline, inflation runs higher at 2.5%.
There are some positive signals in the shorter-term data, however. The three-month annualized core inflation eased to 2.4%, suggesting improved momentum beneath the surface.
Provincial Differences Emerge
The national cooling of inflation isn’t being felt equally across Canada. While most of the country saw prices moderate, inflation actually increased in Newfoundland and Labrador to 1.6% (up from 1.2%), and Prince Edward Island also bucked the trend with higher rates.
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Market Reaction and Rate Cut Prospects
Financial markets adjusted their expectations slightly after the report, with the probability of a September interest rate cut nudging up to about 40%. Economists remain divided on the Bank of Canada’s next move.
Doug Porter of BMO described the report as “relatively favourable” and suggested it “slightly turned the dial” toward a September cut. CIBC’s Andrew Grantham noted that the shorter-term, three-month core inflation readings support a potential rate reduction.
Tariff Concerns Emerge
The Bank of Canada is also monitoring how the ongoing tariff dispute with the United States might affect prices. Some evidence suggests these trade tensions are contributing to higher costs for durable goods, particularly automobiles.
BMO’s Porter noted, “The trade war has had an effect on auto prices and autos are a big share of the CPI. So yes, unfortunately we have not totally escaped the trade war in our inflation data.”
With the Bank of Canada’s next interest rate decision scheduled for September 17, July’s inflation report represents the first of two critical inflation reads that will influence whether Canadians might see lower interest rates this fall.
