Quick take

Call it what you will, inflation has become scorching hot

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  • The Consumer Price Index (CPI) surged 3.7 per cent in July, its highest year-over-year growth in a decade. This month’s reading was sharply up from the 3.1 per cent gain in June and well above the consensus forecast of 3.4 per cent.
  • Gasoline prices continued to push higher in July (+30.0 per cent), albeit slower than in June (+32.0 per cent). Meanwhile, food prices went up by 1.7 per cent, up from the 1.3 per cent in previous month. The gains in food prices were primarily due to food purchased from restaurants, which grew at the highest rate (+3.1 per cent) since January 2019.
  • Excluding food and gasoline prices, core inflation went up 2.8 per cent, ticking higher than the 2.2 per cent gain in June. Shelter prices contributed the most to July’s price gains which were driven mainly by homeowners’ replacement costs (+13.8 per cent). Prices of goods (+5.0 per cent) also exerted upward pressure on inflation last month, with durable goods (+5.0 per cent) accelerating the most. Meanwhile, prices of alcoholic beverages (+1.7 per cent) and clothing (+1.0 per cent) slowed compared with June.
  • Seasonally adjusted CPI went up 0.5 per cent, higher than the 0.2 per cent in June.
  • The Bank of Canada’s core inflation measures mostly went up in July compared to last month. CPI-Trim jumped to 3.1 percent from 2.7 per cent and CPI-median edged up to 2.6 per cent from 2.4 percent. Meanwhile, CPI-common remained at 1.7 per cent.

Key insights:

  • Transitory or not, inflation is running hot right now. And July’s data confirms that. Whose to blame? Well, a combination of factors including lingering supply chain disruptions, base effects from last year, and greater consumer demand as provinces reopen.
  • Its not just the consumers that are feeling the pinch, but also the businesses. The longer businesses experience higher costs, the more they will pass it on to consumers rather than absorb it. So, if your grocery bill hasn’t gone up yet, chances are it’s about to!
  • Looking ahead, most of the inflationary pressures are temporary but are likely to persist until end-2021. A lot depends on the pattern of consumer demand and supply side bottlenecks. And while inflation expectations remain broadly anchored, they are slowly but surely trending upwards. The Bank of Canada has got its work cut out.

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Anna Feng

Anna Feng


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