Canada’s inflation rate climbed to three percent in July, propelled by escalating tensions in the Middle East triggering a surge in gas prices. Statistics Canada reported that the cost of gas rose at a faster pace in July, increasing by 25.7 percent year-over-year, compared to a 20.5 percent growth in June. The data agency attributed the pressure on energy prices to disruptions in shipping routes in the Red Sea and the blockade in the Strait of Hormuz.
The three percent inflation rate slightly surpassed economists’ predictions. Most experts had anticipated a slight uptick to 2.9 percent. In addition to higher gas prices, the cost of travel tours surged in July, with more expensive hotels and flights to U.S. destinations during the FIFA World Cup contributing to the overall increase.
Notably, jet fuel costs drove up air transportation prices, which rose by 12 percent in July, compared to 9.6 percent in June. However, BMO senior economist Robert Kavcic mentioned that some of these cost pressures are expected to be short-lived, as gas prices have slightly declined in August following the conclusion of the World Cup.
On the other hand, food prices helped offset inflationary pressures elsewhere. Inflation for food purchased from stores moderated to 3.1 percent in July, down from 3.9 percent in the previous month. The deceleration was driven by slower growth in fresh vegetables, chicken, and cereal products, while the inflation for fresh fruit accelerated to 6.1 percent due to soaring costs of berries and melons.
Despite the favorable food price trends in July, Statistics Canada highlighted that grocery price inflation has continuously outpaced the all-items consumer price index for the past 18 months. Core measures of inflation, excluding volatile components like gas and food, rose slightly higher than expected in July. The consumer price index, excluding gas, increased by 2.2 percent for the third consecutive month.
While some short-term core inflation measures showed a slight uptick, they remained within the Bank of Canada’s target range. BMO’s Kavcic noted that despite the modest inflationary pressures in July, the inflation landscape appears stable. The latest inflation figures in July will factor into the Bank of Canada’s upcoming interest rate decision on September 2. Experts predict that the central bank will maintain its benchmark interest rate at 2.25 percent, as core inflation measures remain subdued.
Both BMO and CIBC economists expect the Bank of Canada to keep interest rates unchanged for the remainder of the year, as the core inflation indicators suggest no urgency to respond to inflationary pressures.