Canadian inflation jumps in July, raising prospect of another rate hike

By Ismail Shakil and Steve Scherer

OTTAWA (Reuters) – Canada’s annual inflation rate surged more than expected to 3.3% in July as core measures eyed by the central bank remained stubbornly high, data showed on Tuesday, increasing the likelihood of another interest rate increase.

Analysts polled by Reuters had forecast inflation would rise to 3.0% from the 27-month low of 2.8% recorded in June. The consumer price index was up 0.6% on a month-over-month basis, Statistics Canada said, also higher than a forecast of a 0.3% gain.

The average of two of the Bank of Canada’s core measures of underlying inflation, CPI-median and CPI-trim, came in at 3.65% compared with 3.70% in June.

Statscan said the rise in headline inflation was mainly attributable to a base-year effect in gasoline prices, as a large monthly decline in July 2022 was no longer affecting the 12-month movement.

“I think we’re getting another round of spiraling upside risks to inflation in Canada,” said Derek Holt, vice president of capital markets economics at Scotiabank. “Hikes aren’t done in my opinion.”

Money markets increased bets for a quarter-percentage-point rate hike in September. They saw a 35% probability immediately after the release of the inflation data, up from 22% beforehand, and then settled back to a 31% chance.

The Canadian dollar was trading 0.1% lower at 1.3465 to the greenback, or 74.27 U.S. cents, after touching a one-week low at 1.35 before the data.

The bank hiked its benchmark overnight rate to a 22-year-high of 5.0% in July after inflation hit a four-decade high of 8.1%. It was the 10th increase since March of last year.

Not all economists thought the stronger-than-expected price data would tip the scales toward a hike as soon as its next meeting in September.

The Bank of Canada projected in July that inflation would hover around 3% for about a year, before creeping down to its 2% target by the middle of 2025.

“Given the Bank of Canada has given itself a long time to reach the 2% inflation target, this likely won’t be enough to bring central bankers off of the sidelines,” said Tiago Figueiredo, an economist at Desjardins Group.

“We see it as close to a 50-50 proposition whether they hike or not, although we tend to lean towards a hold given the softening job market,” said Jules Boudreau, a senior economist at Mackenzie Investments.

Canada’s economy unexpectedly shed a net 6,400 jobs in July and the jobless rate ticked up to 5.5%, Statscan said earlier this month.

Grocery prices rose 8.5% in July, the slowest pace in more than a year, mainly due to prices for fresh fruit and, to a lesser extent, bakery products, Statscan said.

Excluding food and energy, prices rose 3.4% compared with a 3.5% rise in June. Services prices rose 4.3% annually in July, while the price of goods increased 2.3%.

The Bank of Canada, after its last rate hike in July, said it would study data closely before moving again. It will have second-quarter GDP data, due on Sept. 1, to take into account before the next rate announcement on Sept. 6.

(Reporting by Ismail Shakil and Steve Scherer in Ottawa; Editing by Dale Smith, Paul Simao and Jonathan Oatis)