In July, Canada’s inflation rate climbed to three percent, influenced by renewed conflicts in the Middle East that led to a rise in gas prices.
Statistics Canada revealed that the price of gas surged by 25.7 percent year-over-year in July, a notable increase from June’s rate of 20.5 percent.
The agency attributed the pressure on energy prices to disruptions in the Strait of Hormuz and a partial blockade of shipping routes in the Red Sea. The previous month, diplomatic efforts had temporarily eased tensions in the region, resulting in a drop in gas prices and a reduction in inflation to 2.8 percent in June.
The three percent figure exceeded economists’ forecasts, who had anticipated a slight rise to 2.9 percent ahead of Monday’s announcement.
Travel expenses also saw a sharp increase in July, as higher hotel rates and airfare to U.S. locations during the FIFA World Cup contributed to the surge.
In addition, rising costs of jet fuel drove air travel prices up by 12 percent year-on-year in July, compared to a 9.6 percent increase in June.
However, some of this upward trend is expected to be temporary, as noted by BMO senior economist Robert Kavcic in a communication to investors, with the World Cup concluded and gas prices having slightly declined in August.
Conversely, food prices helped mitigate inflationary pressures elsewhere. The inflation rate for groceries fell to 3.1 percent in July, down from 3.9 percent in the prior month.
This deceleration was driven by slower price growth for fresh vegetables, chicken, and cereal products. In contrast, fresh fruit inflation accelerated to 6.1 percent, particularly due to rising costs for berries and melons.
Despite the favorable food inflation figures for July, Statistics Canada highlighted that grocery price inflation has now surpassed the overall consumer price index for 18 consecutive months.
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Kavcic from BMO also observed that core inflation metrics, which exclude some volatile items like gas and food, were slightly above expectations in July.
When excluding gas, the consumer price index increased by 2.2 percent in July for the third month in a row, according to Statistics Canada. Core inflation measures, CPI-trim and CPI-median, were also marginally higher than anticipated, according to Kavcic.
Despite the slight uptick in some short-term core inflation metrics, Kavcic noted they remained within the Bank of Canada’s target range.
Kavcic stated, “The inflation landscape appears stable and well-managed, even with some uptick in July.”
The inflation data for July represents the last assessment by the Bank of Canada before its upcoming interest rate decision on September 2. The central bank has maintained its benchmark interest rate at 2.25 percent through six consecutive decisions, and both Kavcic and CIBC senior economist Andrew Grantham expect this trend to continue in September.
Both economists concurred that the core inflation figures for July were subdued enough to suggest that the Bank of Canada need not hasten to raise its benchmark interest rate in response to inflationary pressures, with both BMO and CIBC anticipating the central bank will remain steady for the remainder of the year.
