Quick take

Signs of Slowing CPI Growth in July [Audible Sigh of Relief]

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  • In July, the Consumer Price Index (CPI) rose by 7.6 per cent (y/y).
  • Gasoline prices fell by 9.2 per cent (m/m) but were 35.6 per cent higher than a year ago. Year-over-year food prices increased in stores (+9.9 per cent) and restaurants (+7.3 per cent).
  • Excluding food and energy, the CPI climbed by 5.5 per cent in July (y/y). Year-over-year prices were higher in all eight major CPI components. Rising prices in many shelter and transportation subcategories remained key contributors to overall CPI growth.
  • On a seasonally adjusted monthly basis, the CPI went up 0.3 per cent in July, which was lower than the increase of 0.5 per cent in June.
  • The average of the Bank of Canada’s three core inflation measures moved up to 5.3 per cent in July from 5.2 per cent in June. CPI-median grew to 5.0 per cent and CPI-common moved up to 5.5 per cent. However, CPI-trim fell slightly to 5.4 per cent from 5.5 per cent in June.

Key Insights

Could this be the beginning of the end of our inflationary ascent? Year-over-year growth of Canada’s CPI may be heading in a more positive direction; namely, downward. Gasoline prices fell in July which helped to ease price pressures throughout the economy. The psychological effects of falling fuel prices also bode well for inflation expectation setting. Fluctuations in the price of gas disproportionately influence consumer perceptions of inflation. The flurry of optimistic headlines that are likely to follow today’s release may also help to soothe the anxious animal spirits that have disturbed Canadian consumers this year.

Yet, inflation remains elevated and measures of core inflation still paint a troubling picture. Core inflation excludes items with volatile prices and gauges the underlying trend in price growth. Two of the Bank of Canada’s core inflation measures continued to rise in July, which signals that Canada’s price growth problems are not fully in the rear-view mirror. Prices for many services (like recreation) have room to grow. Shelter prices may expand as mortgage and rent costs rise. Geopolitical uncertainty is also alive and well and the risks of an upside surprise to inflation are ever-present.

It will take more than one month of good news to sway the Bank of Canada. The Bank will be glad to see inflation falling. And we’re not likely to see any more 100-basis point boosts to interest rates this year. But rates certainly have further to climb. Headline CPI may have fallen but it has a long way to drop before reaching the Bank’s inflation target range. Canadian consumers and businesses may see today’s release as good news, but they must still reckon with the implications of today’s elevated prices. Labour strife is rising and wage demands are growing. The summer of our inflationary discontent is not over yet.

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Kiefer Van Mulligen

Kiefer Van Mulligen

Economist

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