It’s Not a Happily Ever After Story for Inflation Just Yet

  • In July, the Consumer Price Index (CPI) rose by 3.3 per cent (y/y). This was higher than June’s 2.8 per cent (y/y) increase.
  • Gasoline prices rose by 0.9 per cent (m/m) but were 12.9 per cent lower than a year ago. Year-over-year, food prices increased in stores (+8.5 per cent) and restaurants (+6.1 per cent).
  • Core CPI (excluding food and energy) grew by 3.4 per cent in July (y/y), lower than the 3.5 per cent increase (y/y) in June. Higher prices in several shelter and food subcategories were key to overall CPI growth.
  • On a seasonally adjusted monthly basis, the CPI grew by 0.5 per cent in July (compared to an 0.3 per cent increase in June).
  • The average of the Bank of Canada’s three core inflation measures fell to 4.0 per cent in July from 4.2 per cent in June. CPI-common fell to 4.8 per cent, CPI-median remained flat at 3.7 per cent, and CPI-trim slid to 3.6 per cent.

Key Insights

  • Much to the dismay of Canadians, year-over-year consumer price growth picked up again in July. Mortgage interest costs continued to grow at a breakneck pace (30.6 per cent y/y), with rental price growth also elevated at 5.5 per cent (y/y). Food price growth remains alarmingly high at 7.8 per cent. Russia’s withdrawal from an agreement allowing Ukraine to export grain safely will have a non-negligible impact on global grain prices, which will wind its way into Canada’s CPI over the coming months. Gasoline price growth has also levelled off on a year-over-year basis. Falling gasoline prices have been a major factor behind inflation’s descent this year. Moving forward, gasoline prices will likely start adding pressure to headline inflation rather than helping to tame it.
  • The Bank of Canada’s July press release and Monetary Policy Report presented a more pessimistic view – and a more hawkish tone for the direction of monetary policy. The Bank did not claim victory in the latest multi-year struggle against elevated price growth after inflation tipped within its target range in June. Instead, the Bank argued that inflation would linger around 3 per cent for the rest of 2023 and won’t fall to its 2 per cent target until 2025 – at least 2 quarters later than it expected as recently as April. In support of this thesis, core inflation remained slow to fall in July, with the Bank’s two preferred core measures (CPI-median and CPI-trim) averaging 3.7 per cent. If it takes two more years for headline inflation to reach 2 per cent, the Bank may be more cautious about drawing down interest rates lest underlying inflationary pressures reignite.
  • There are material reasons for being cautious about recent success in bringing inflation down. Consumer inflation expectations remain much higher than before the pandemic, when price growth generally hovered around 2 per cent for decades. And elevated inflation expectations suggest that calls for higher wages will continue. In fact, year-over-year wage growth accelerated to 5.0 per cent in July from 4.2 per cent in June. Consumers are also paying more attention to price changes, which suggests that inflation is changing consumer behaviour. Businesses, too, expect to make more frequent and sizable adjustments to prices in the latter half of 2023. If these attitudes solidify, it will be much more difficult to stabilize inflation around the Bank’s target.

For more details about our inflation forecast and inflation’s impact on the Canadian economy, please consult our Canadian Three-Year Outlook.