Canadian CPI falls to 1.7% in July
Canada’s rate of inflation posted another surprise improvement in July – but when you look under the hood, it’s clear shoppers are still grappling with steep living costs.
Statistics Canada reports that year-over-year growth for the Consumer Price Index dropped to 1.7% in July from 1.9% in June, now back on par with May’s reading. That’s the fourth month in a row that the headline inflation number came in under the 2% target set by the Bank of Canada, and could open the door for rate cuts later this fall.
However, the devil is in the details – in this case, at the gas pump. StatCan points out that much of the drop can be attributed to lower energy prices compared to a year ago, largely due to the removal of the federal consumer carbon tax in April; had it not been cut, inflation would have come in at 2.5%. Lower gas prices also helped pull the inflation number lower, down 16.1% year over year, following a similar 13.4% drop in June.
Grocery prices pick back up
While that offered welcome price relief while filling up, Canadian wallets were squeezed further at the grocery store, as food costs rose at a faster pace than in previous months in July, up 3.4% annually, compared to the 2.8% increase in June.
Much of the price increases were due to confectionary and coffee prices, which rose 11.8% and 28.6%, respectively. Fresh fruit prices also rose 3.9% on an annual basis. Overall, says StatCan, shoppers are shelling out 27.1% more to buy food in stores than they did back in July 2020.
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Shelter costs also on the rise
Renters are also feeling the brunt; rents rose by 5.1% year over year in July, up from a 4.7% increase in June. This pushed the overall shelter index up by 3%, compared to 2.9% last month – the first time the shelter measure has increased since February 2024.
Mortgage interest costs, meanwhile, continued to drop, as interest rates are lower than where they were last year. The measure came in at 4.8%, down from 5.6%. Overall, the amount homeowners have paid on mortgage interest has steadily declined since hitting a peak of 30.9% in August 2023.
Core inflation remains high – and that’s a problem for interest rates
A lower headline inflation number is good economic news, and could persuade the Bank of Canada to lower its benchmark cost of borrowing; when inflation is within target and the economy shows signs of slowing – as it has amid ongoing trade pressures – the Bank lowers interest rates to encourage spending. When inflation is rising, however, it does the opposite – hiking interest rates dissuades excessive spending and borrowing, and helps cool price growth.
This most recent month-over-month CPI drop certainly opens the door to lower rates – but there are a few factors that will give the BoC pause. The fact is, when the factors that pull the headline number are stripped out, most price categories are rising. The “core” measures of inflation – called the CPI trim and median – remain elevated in the 3% range. This has the BoC walking a fine line; it’s clear some rate stimulus will be needed in the coming months, but it won’t take much to set inflation back on a higher path.
Overall, though, this most recent report has increased expectations of a rate cut; money markets are now pricing in a 38% chance of a quarter-point reduction in the BoC’s next announcement on September 17, up from the previous 32%. However, the next CPI report will come out on the 16th, which will give the Bank more data to mull over; if that report surprises again on the downside, a rate cut will be all the more assured.
A lower benchmark rate from the Bank of Canada would in turn lower variable mortgage rates, as well as for various loan types, including HELOCs, and certain types of personal loans and auto loans. It also lowers business investment costs, and makes it easier for consumers to obtain credit – overall good news for Canadians who’ve been strapped for cash as prices have soared post-pandemic.
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Penelope Graham, Head of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.