Canada Inflation Quickens to 3.3% But Core Measure Shows Progress

Inflation ticked back above the Bank of Canada’s control range in July, but progress on underlying price pressures leaves room for policymakers to pause interest-rate hikes.

(Bloomberg) — Inflation ticked back above the Bank of Canada’s control range in July, but progress on underlying price pressures leaves room for policymakers to pause interest-rate hikes.

The consumer price index rose 3.3% from a year ago, the first reacceleration since April, Statistics Canada reported Tuesday in Ottawa. That was faster than the 3% forecast by economists in a Bloomberg survey. On a monthly basis, the index rose 0.6%, double their expectations.

Canada’s headline rate is now above that in the US for the first time in three years. But the uptick is watered down by some easing in core measures. Two key yearly metrics tracked closely by the Canadian central bank — the so-called trim and median core rates, which filter out extreme price fluctuations — eased, averaging 3.65% from a downwardly revised 3.7% a month earlier. 

“The modest slowing in core CPI is a bit of a silver lining for policymakers in a generally strong CPI report,” Benjamin Reitzes, a rates and macro strategist at Bank of Montreal, said by email. The Bank of Canada “likely wants to move to the sidelines in September and give prior hikes time to have an impact, but the inflation figures aren’t making that an easy call.”

A three-month moving average of the measures that Governor Tiff Macklem says is key to his team’s thinking fell to an annualized pace of 3.49%, from an upwardly revised 3.91% previously, according to Bloomberg calculations. That’s the slowest rate of increase since October 2022. 

The loonie umped after the release of the data, before paring those gains to trade at C$1.3476 per US dollar at 11:41 a.m. Ottawa time. Canadian bonds slipped, with the yield on two-year debt up 4 basis points on the day to 4.767%.

Tuesday’s numbers highlight a challenge in the current phase of the inflation fight after favorable base effects — which lent a helping hand to the deceleration in recent months — ran their course. July’s rise was partly due to gasoline prices, which fell sharply in July 2022 and so didn’t have the same downward impact on the 12-month headline figure as in June. 

Macklem and his officials expect consumer price gains to remain near 3% for the next year, saying last month that the next stage in the decline toward the 2% target is “expected to take longer and is more uncertain.”

The latest inflation print with cooling core measures — along with recent signs of softening in the economy and labor market — may pave the way for policymakers to return to pause mode as early as their next meeting on Sept. 6. The majority of economists expect the central bank to hold the overnight rate steady at 5% next month.

“Domestic demand in Canada’s economy continues to hum along, and as a result we expect progress on inflation to remain disappointing through the remainder of the year,” Leslie Preston, senior economist at Toronto-Dominion Bank, said in a report to investors. “This is pushing up expectations that the BoC may pursue another rate hike in the fall months as it gathers more information on the jobs market and overall inflation.”

Tuesday’s release is the last of two inflation reports before the September decision. 

The continued above-target gains in the core measures “will cause some concern for the Bank of Canada and means it is still too early to rule out a further interest rate hike altogether,” Olivia Cross, an economist at Capital Economics, said in a report to investors. “Nonetheless, we still expect a more pronounced easing of core inflation later this year.”

Services inflation rose to 4.3% in July from 4.2% one month earlier. 

On a year-over-year basis, prices for gasoline fell 12.9% in July after a 21.6% decline in June, while on a monthly basis, prices remained nearly unchanged at 0.9%.

The mortgage interest cost index posted another record year-over-year gain and remained the largest contributor to the headline rate. Excluding mortgage costs, the rate rose 2.4%.

Grocery prices grew at a slower pace year over year, rising 8.5% last month after a 9.1% increase in June.

On a monthly basis, higher prices for travel tours and air transportation led the gain, jumping 15.5% and 13.6% respectively, with July being a peak travel month.

Regionally, prices rose at a faster pace in July compared with June in all provinces except British Columbia and Saskatchewan. Price growth accelerated the most in Prince Edward Island, largely due to a rise in energy prices.

Electricity prices rose 127.8% in July from a year ago in Alberta amid high summer demand and followed the phasing out of provincial rebates and a price cap.

In Nova Scotia, consumers saw gasoline prices jump 14% from a month earlier, the fastest pace in the country, primarily due to the introduction of the carbon levy and higher wholesale prices.

–With assistance from Erik Hertzberg.

(Updates with new size and scope on 3-month moving average of core measures.)

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