Canada’s inflation rate dropped to 1.7% in July, marking a significant decline from June’s 1.9% reading and beating economist expectations in a development that could influence the Bank of Canada’s September interest rate decision. This encouraging headline figure masks underlying concerns about persistent food price increases that continue to strain household budgets across the country. The inflation slowdown was primarily driven by falling gasoline prices, which declined 16.1% year-over-year, providing temporary relief to consumers facing ongoing cost-of-living pressures. However, economists remain divided on whether this single month’s improvement will be sufficient to convince policymakers to cut interest rates from their current 2.75% level.
How falling gasoline prices drove Canada’s inflation rate below expectations
Canada’s annual inflation rate eased to 1.7% in July from 1.9% in the prior month as lower year-on-year gasoline prices kept the consumer price index low, data showed on Tuesday.
Economists also cheered the three-month average of the core measures, which eased to below 3% after several months, boosting hopes of a rate cut in September.
Analysts polled by Reuters had forecast the annual inflation rate at 1.8% and the monthly inflation rate at 0.3%. The CPI increased by 0.3% in July from 0.1% in June on a monthly basis, Statistics Canada said.
Gasoline prices dropped by 16.1% on a yearly basis in July, following a 13.4% decline in June. On a monthly basis, the price of the fuel dropped as geopolitical tensions eased and crude oil-producing nations increased output.
The elimination of a carbon levy on petrol purchases has helped bring down the cost of the fuel on a yearly basis and is expected to maintain downward pressure on the CPI basket for another eight months.
What persistent food price increases mean for Canadian household budgets
The overall consumer price index has held below the mid-point of the Bank of Canada’s 1% to 3% target range, even as there are signs of rising prices of food.
Excluding gasoline, the CPI rose 2.5% in July, StatsCan said.
Core measures of inflation, which are closely tracked by the Bank of Canada, have remained resilient and hovered around the top of the bank’s preferred range of CPI.
The share of the CPI basket which is above 3% continues to be elevated at over 37%, data showed.
The average of the three months of annualized core measures slipped to 2.4% in July, the first time since September last year, said Doug Porter, chief economist at BMO Capital Markets.
September rate cut remains uncertain despite improved inflation data
“If that more recent pace in core is maintained, and the economy remains soft, we believe that will eventually set the stage for BoC cuts,” he said, but cautioned the three-month annualized metric could swing wildly with one month of aberration in data.
Money markets are betting the odds of a rate cut on Sept. 17 at 40%, up from 32% before the inflation data, after the bank has stayed put at 2.75% for its last three rate decision meetings.
The Canadian dollar CAD weakened and was trading down 0.23% after the inflation data. Two-year government bond yields CA2YT=RR were down 3.5 basis points to 2.704%.
The Bank of Canada faces a complex decision-making environment where encouraging headline inflation data must be weighed against persistent underlying price pressures and broader economic uncertainties. While the July inflation reading provides some optimism for potential monetary policy easing, policymakers remain concerned about trade policy uncertainties and the resilience of core inflation measures that exclude volatile components. The central bank’s cautious approach reflects recognition that single-month improvements may not represent sustainable trends, particularly given ongoing challenges from food price inflation and shelter costs that directly impact Canadian households. Market expectations for a September rate cut have increased modestly, but economists emphasize that additional economic data will be crucial in determining the central bank’s next policy move.
GCN.com/Reuters.