Gasoline Price Rebound Pushes Canada Inflation Rate to 3%

By Nojoud Al Mallees

Canada’s inflation rate accelerated to 3% as the Middle East conflict pushed up gasoline prices, while core measures of price growth remained subdued.

Prices at the pump rose at a 26% yearly pace in July, up from 21% in June, Statistics Canada reported on Monday. Excluding gasoline, the consumer price index was up by 2.2% for a third straight month. Inflation rose by 0.5% on a monthly basis.

Economists surveyed by Bloomberg had expected headline inflation to tick up to 2.9%, from 2.8% in June.

The average of the Bank of Canada’s preferred core measures of inflation rose at a 1.95% yearly pace, edging up from 1.90% the previous month.

Still, that’s below the bank’s 2% target, and the latest data suggests broader inflationary pressures remain contained, with limited evidence of higher energy costs driving up prices elsewhere in the economy.

“The generally subdued readings for core inflation on a year-over-year basis mean that there’s no rush for the bank to raise interest rates,” Andrew Grantham, an economist with Canadian Imperial Bank of Commerce, wrote in a report to investors.

“Policymakers have plenty of time to assess oil price fluctuations, how the tariff situation plays out and whether the rebound in economic activity we are currently witnessing can be sustained,” he said.

The loonie rose against the US dollar after the release, gaining 0.2% to C$1.3853 as of 9:55 a.m. in Ottawa.

Short-term Canadian debt fell, lagging major peers. At the long end, the 30-year yield was up 2.8 basis points to 4.117%, after touching the highest intraday level since 2010. Swap traders are pricing about 16 basis points of tightening from the Bank of Canada by December, slightly higher than on Friday.

The Bank of Canada has held its policy interest rate at 2.25% for six consecutive meetings, as weakness in the economy offset some inflationary pressures from the trade war and Middle East conflict. As growth picks up, however, the central bank will have its eye on whether higher energy prices lead to a broadening out in price pressures.

The July labor force survey showed the unemployment rate fell to 6.4%, marking a two-year low, as employment rose by 75,100. StatCan’s preliminary estimate for GDP suggests the economy expanded at an annualized rate of 3.4% in the second quarter, faster than the central bank had projected for the three-month period.

“There’s a lot of push and pull on the growth side of the Canadian economy — or example, a powerful second quarter rebound still to be tested by ongoing trade uncertainty,” said Bank of Montreal senior economist Robert Kavcic in a note to investors. “But the inflation side is looking stable and well-behaved despite a bit of heat in July. We continue to see the Bank of Canada on hold for the remainder of the year.”

Prices for travel tours and air transportation also pushed inflation higher in July, rising by 15.2% and 12% respectively as the World Cup boosted demand and jet fuel costs rose.

Desjardins Chief Economist Jimmy Jean said the rate of increase in travel costs was a surprise. But the report shouldn’t worry policymakers too much, he said.

“It’s one tick higher than what we were expecting so I wouldn’t say that this is a fundamental deviation, relative to what the Bank of Canada might have anticipated,” Jean said on BNN Bloomberg Television.

Grocery prices rose at a slower pace in July, increasing by 3.1% on an annual basis, down from 3.9% in June. Still, July marked the eighteenth consecutive month that grocery prices rose faster than overall inflation.

Meanwhile, shelter price inflation rose by 1.3%, the slowest rate since May 2020. Shelter costs have been rising at a rate below 2% since the start of the year, as the Canadian housing market remains soft.

Ontario was the only province that did not see an acceleration in inflation last month, driven by declines in homeowners’ replacement cost and for natural gas.

— With assistance from Mario Baker Ramirez and Carter Johnson

(Adds economist reaction, details starting in ninth paragraph, tweaks langauge)

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