Canada’s consumer price index (CPI) rose to 3 per cent in July, up from 2.8 per cent previously, thanks to higher gasoline and travel tours prices.
Measures of core inflation remained slightly below target at 1.95 per cent on average. This suggests that as of now, inflation remains a result of oil prices as opposed to being broadly entrenched in Canada’s economy.
It’s important to remember that gas prices are tethered to geopolitical volatilities—and are firmly outside of the Bank of Canada’s control. If gasoline prices stabilize in the coming months, it is reasonable to expect headline inflation to trend back down toward target.
Looking ahead, we expect headline inflation to fluctuate with geopolitical uncertainty, while core inflation should stay stable. Even with steady core inflation, The Bank of Canada will most likely hold its key interest rate at 2.25 per cent in September and through the end of the year to allow for recovery to take hold.
The July jobs report showed substantial improvements in the Canadian economy; as a result, the growth rate forecast for 2026 was revised upward. A premature rate hike, especially when there is no evidence of broad-based high inflation, would unnecessarily stunt the growth and prevent recovery.
What the data shows
Geopolitical conditions continued to dominate the CPI, with the war in the Middle East pushing gasoline prices upward. Gasoline prices grew 25.7 per cent on a year-over-year basis; this was the major factor that contributed to higher headline inflation.
Prices of air transportation also rose 12 per cent on a year-over-year basis due to higher jet fuel costs—which also contributed to elevated inflation.
That said, inflationary pressures remain narrow and concentrated in gasoline and energy. Excluding gasoline, inflation was at near target at 2.2 per cent.
In contrast, shelter inflation is now firmly below the headline number thanks to lower rental and purchase prices for housing. Shelter inflation fell to 1.3 per cent—the lowest since May 2020 and before the real estate boom spurred by zero per cent interest rates.
This presents a relief for Canadian households as housing and rental prices in some cases returning to pre-pandemic levels after years of climbing rapidly.
Food inflation fell from 3.5 per cent in June to 3 per cent—the lowest in over a year and in line with the headline number.
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