Inflation climbs to 3% in July as gasoline prices surge, but core measures stay near 2%

Canada's annual inflation rate rose to 3.0 per cent in July from 2.8 per cent in June, Statistics Canada said Monday, pushed up by another jump in gasoline prices. The reading sits at the top of the Bank of Canada's 1 to 3 per cent control range.

Economists had expected 2.9 per cent. On a monthly basis, the Consumer Price Index rose 0.5 per cent, or 0.3 per cent after seasonal adjustment.

Gasoline does the heavy lifting

Gas prices were 25.7 per cent higher than a year earlier, up from a 20.5 per cent annual increase in June. Middle East hostilities and the blockade of the Strait of Hormuz have kept energy markets tight, and a partial closure of Red Sea shipping routes in late July added further pressure.

Strip gasoline out and the picture is calmer: the CPI excluding gasoline rose 2.2 per cent for a third straight month.

• Travel tours rose 15.2 per cent from a year earlier, up from 6.8 per cent in June, as Canadians paid more for hotels and flights to U.S. cities hosting the FIFA World Cup.
• Air transportation rose 12.0 per cent.
• Food purchased from stores rose 3.1 per cent, slower than June's 3.9 per cent, though grocery inflation has now outpaced the overall CPI for 18 consecutive months.
• Shelter costs rose 1.3 per cent.

Core inflation and the Bank of Canada

The Bank of Canada's preferred core measures moved up slightly but stayed close to its 2 per cent target. CPI-median rose to 2.0 per cent and CPI-trim to 1.9 per cent, each a tenth of a point above forecasts.

The central bank held its policy rate at 2.25 per cent on July 15, its sixth consecutive hold. Most bank economists expect it to stay there. "Given the competing forces on inflation, we expect the Bank of Canada to stay on hold through the balance of the year," said Andrew Hencic, senior economist at TD Economics, as quoted by Canadian Mortgage Professional.

The hawkish view

Not everyone is relaxed. Scotiabank is forecasting 50 basis points of rate hikes in the fourth quarter, arguing in a July report that underlying cost pressures are running at levels "inconsistent with a comfortable return to target." The risk is that persistently high fuel prices seep into transportation, travel and food costs, and into Canadians' expectations about future inflation.

Regional differences

Prices rose faster year over year in every province. Ontario posted the lowest rate at 2.0 per cent, helped by an 18.7 per cent drop in natural gas prices. Nova Scotia posted the highest at 5.0 per cent, with rent up 8.7 per cent. Quebec's rate was 3.3 per cent and British Columbia's 2.9 per cent.

What it means for your household budget

For households, the headline number mostly reflects what you already see at the pump. With core inflation near 2 per cent, a quick rate hike looks less likely than the 3 per cent figure suggests, which matters for anyone with a variable-rate mortgage or a renewal coming up. Savers should note that a high-interest savings account or GIC paying less than about 3 per cent is currently losing ground to headline inflation. This is general information, not personal advice.

Related

• How to beat inflation
• Fixed vs. variable mortgage

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