Canada Inflation Hits 3% as Gas Spike Keeps BoC on Hold

Canada's inflation accelerated to 3% in July, a tick hotter than expected, yet the pickup was driven almost entirely by gasoline and travel costs, keeping the Bank of Canada on track to hold its policy rate at 2.25% on Sept. 2.

"Core inflation remained benign in July, and there continues to be little evidence of widespread passthrough of higher energy prices to the broader CPI basket," said Michael Davenport, senior economist at Oxford Economics.

Statistics Canada said Monday the consumer-price index rose 0.5% in July, lifting the annual rate from 2.8% in June and above the 2.9% consensus. Gasoline prices jumped 25.7% from a year earlier, accelerating from a 20.5% advance in June, as the blockade of the Strait of Hormuz and partial closure of Red Sea shipping routes pressured fuel costs. Travel tour prices also rose faster, lifted by pricier hotels and flights to U.S. cities hosting World Cup matches, while airfares climbed 12%. Food bought from stores rose 3.1%, cooling from 3.9% in June, though July marked the 18th consecutive month grocery inflation outpaced the all-items CPI. The Canadian dollar firmed 0.17% to C$1.3851 against the U.S. dollar, with the pair defending its 200-day moving average near 1.3848.

The report is the last inflation reading before the Bank of Canada's Sept. 2 decision, and financial markets price nearly 99% odds of a hold, according to LSEG Data & Analytics. With core measures averaging 1.95% and a possible 50% U.S. tariff on C$20 billion of exports looming Aug. 19, policymakers have little incentive to move.

Core Inflation Holds Near Target

The central bank's preferred measures of underlying inflation advanced only slightly in July. The trimmed mean and weighted median gauges averaged 1.95% annually, up from 1.9% a month earlier, while core prices excluding volatile food and energy rose 1.9% from a year earlier after a 1.8% gain in June. The all-items CPI excluding gasoline held at 2.2% for a third straight month.

The share of the CPI basket running above 2% on an annual basis fell one percentage point in July to 51%, said Daniel Hyun, senior economist at KPMG Canada. He forecasts the Bank of Canada will leave interest rates steady for the foreseeable future while inflationary pressure remains narrow and trade uncertainty lingers.

Shelter costs, including rents and mortgage interest costs, rose 1.3% in July, a further deceleration that Davenport said should keep core inflation near 2% given excess slack in the economy. He expects headline inflation to hover around 3% for the rest of 2026 because of sticky oil prices.

Trade Risks Loom Over Rate Path

The Bank of Canada has held its benchmark rate at 2.25% across six straight decisions, and economists see little reason to change course. BMO senior economist Robert Kavcic said the inflation side is "looking stable and well-behaved despite a bit of heat in July," even as a powerful second-quarter rebound is tested by ongoing trade uncertainty.

The bigger risk to the outlook is the Aug. 19 deadline for a new 50% U.S. tariff targeting C$20 billion of Canadian exports, which would raise the average effective tariff rate on shipments from Canada. Randall Bartlett, deputy chief economist at Desjardins, said the Bank of Canada will want to "keep its powder dry for the foreseeable future" given the downside risk to growth should the tariffs take effect.

CIBC senior economist Andrew Grantham said policymakers have plenty of time to assess oil price fluctuations, how the tariff situation plays out and whether the economic rebound can be sustained. CIBC forecasts no change in the benchmark rate until around mid-2027.

This article is for informational purposes only and does not constitute investment advice.