Canada experienced a rise in inflation to three per cent in July, driven by escalating tensions in the Middle East that led to an increase in gas prices. Statistics Canada data revealed that gas prices surged by 25.7 per cent year-over-year in July, surpassing the 20.5 per cent growth seen in June.
The unrest in the Strait of Hormuz and disruptions in shipping routes in the Red Sea were identified as key factors impacting energy prices, according to the data agency. The temporary halt in conflict due to peace talks in the Middle East the previous month had helped lower gas prices, resulting in a decrease in inflation to 2.8 per cent in June.
The three per cent inflation rate slightly exceeded economists’ predictions. Initial forecasts had anticipated a marginal increase to 2.9 per cent. Additionally, costs for travel tours surged in July, with higher expenses for hotels and flights to U.S. destinations during the FIFA World Cup contributing to the uptick.
Rising jet fuel expenses drove a 12 per cent year-over-year increase in air transportation prices in July, up from 9.6 per cent in June. However, economist Robert Kavcic from BMO noted that some of these cost pressures are expected to be short-lived as the World Cup has concluded and gas prices have slightly decreased in August.
On the other hand, food prices helped alleviate inflationary pressures elsewhere. The inflation rate for food purchased from stores moderated to 3.1 per cent in July, down from 3.9 per cent in the previous month, primarily due to slower growth in fresh vegetables, chicken, and cereal products. Conversely, inflation for fresh fruit accelerated to 6.1 per cent, driven by soaring costs for berries and melons.
Despite positive food inflation figures for the month, Statistics Canada highlighted that grocery price inflation has outpaced the overall consumer price index for 18 consecutive months. Core inflation measures, excluding volatile components like gas and food, rose by 2.2 per cent in July for the third consecutive month, slightly exceeding expectations.
Kavcic emphasized that despite some upticks in core inflation measures, they remain within the Bank of Canada’s target range. The Bank of Canada is expected to maintain its benchmark interest rate at 2.25 per cent in the upcoming September decision, based on the stable inflation outlook.
The latest inflation data from July will inform the Bank of Canada’s decision-making ahead of its next interest rate announcement. Both Kavcic and CIBC senior economist Andrew Grantham project that the central bank will keep rates unchanged through the rest of the year, given the subdued core inflation measures observed in July.