Food prices in Canada drove higher in July, with grocery prices increasing 3.4 per cent from the year before. (Photo by Zou Zheng/Xinhua via Getty Images) · Xinhua News Agency via Getty Images
Canada’s annual inflation rate slowed to 1.7 per cent in July, down from 1.9 per cent in June, Statistics Canada said Tuesday. Lower gasoline prices — down 16.1 per cent from last year following the removal of the federal carbon tax — did much of the work pulling inflation down, the agency says.
The report offers a mixed picture of the economy. Some prices that matter directly to households — especially groceries and rent — kept climbing, while some of the Bank of Canada’s (BoC’s) preferred inflation measures suggest the pace of price increases is finally cooling. Economists remain divided on what that means for interest rates. Some say the central bank has room to cut in September, while others caution that the Bank may be finished with cuts.
“July’s data removed one obstacle on the path towards a potential September interest rate cut,” CIBC economist Andrew Grantham wrote in a note to clients, pointing to the three-month annualized pace of core inflation easing to 2.4 per cent, the lowest since September 2024.
In the July data, gasoline’s downward pull was countered by grocery prices rising 3.4 per cent, led by jumps in prices for coffee (up 28.6 per cent) and cocoa products (up 11.8 per cent) due to poor weather in producing regions.
Shelter costs also picked up for the first time since early 2024, rising three per cent year over year. Rent inflation reached 5.1 per cent, while mortgage interest costs eased slightly but were still 4.8 per cent higher than a year ago.
On a monthly basis, CPI rose 0.3 per cent in July, or 0.1 per cent after seasonal adjustment.
Excluding gasoline, inflation was 2.5 per cent. The Bank of Canada’s preferred measures — CPI-trim and CPI-median, which strip out extreme price swings to gauge underlying inflation — remained at three and 3.1 per cent, respectively, in July, though most economists note that both have softened on a three-month basis.
Tuesday’s data show “a softer trend” in the core inflation measures, TD Bank senior economist Andrew Hencic says in a note about the release. That trend, coupled with minimal job creation since the outset of the trade war with the United States in February, aligns with the conditions the BoC says could require an interest rate cut, he writes.
“From our lens, we think the BoC will have room to deliver more easing later this year as the economic slack continues to build and offset inflation pressure.”
Desjardins Group also projects a rate cut in September, with economist Royce Mendes writing that the latest figures suggest that earlier tariff-related price increases have already worked through the system. Prices for core goods rose only fractionally, Mendes says, and core services rose 0.16 per cent with shelter costs removed. “These readings suggest that neither goods nor services price growth should keep monetary officials from delivering further easing,” he said.
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Not all forecasters agree that more cuts are coming. RBC’s Claire Fan says the July easing was “welcome,” but cautions that the central bank has already reduced rates significantly over the past year. With government spending expected to rise, she argues, “we don’t expect the BoC will cut again in this cycle” — a position RBC has held for several months.
In a morning note, BMO chief economist Douglas Porter acknowledges the easing three-month trend in the core measures, but notes tenaciously high inflation prices in shelter. Overall, shelter prices were up three per cent from last year, according to Statistics Canada, rising from 2.9 per cent year-over-year in June — “the first acceleration in shelter prices since February 2024.”
“There were no big surprises in the July inflation report, but we probably need a downside surprise at this point to prompt the BoC off the sidelines,” Porter said.
National Bank of Canada economist Jocelyn Paquet also found July’s data unlikely to be enough to sway the BoC, calling it “mildly positive” but “unlikely to be a game-changer.” The Bank “will only be confident enough to cut policy rates again this year if the unemployment rate continues to rise,” Paquet says — though she adds that National Bank expects this to happen.
Financial industry experts had expected inflation to cool slightly to 1.8 per cent, according to consensus estimates published by BMO Economics. In a note last Friday, economist Benjamin Reitzes argued that the Bank of Canada “needs to see at least a couple of months (and probably three) of decelerating inflation before further rate cuts are on the table.”
In June, CPI increased to 1.9 per cent from 1.7 per cent the month before. Prices of gas and durable goods — such as cars and furniture — were factors in that increase.
The next CPI release comes Sept. 16, one day before the Bank of Canada’s next scheduled policy announcement.
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on X @jmacf.
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