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July inflation comes in hotter than expected at 3.3%

Taming inflation has been a one-step-forward, two-steps-back battle for the Bank of Canada, with the July numbers presenting the latest hurdle to reigning the measure back down to its 2% target.

According to Statistics Canada, the Consumer Price Index grew at a year-over-year rate of 3.3% last month, a considerable uptick from the 2.8% recorded in June. The reading also came in higher than many economists’ expectations; calls from Canada’s big banks had ranged from 2.9% to 3.1%. The measure was up 0.6% on a monthly basis following June’s 0.1% gain, which StatCan attributes to “higher monthly prices for travel tours, with July being a peak travel month.”

The increase is largely due to an increase in gasoline prices, the measure for which is no longer being distorted by the significant -9.2% drop that occurred this time in 2022. StatCan states that with gas stripped out, core CPI rose 4.1%, up from 4% in June.

Other notable impacts were electricity prices in Alberta, which surged 127.8% in July, and mortgage interest costs, which posted another record annual gain of 30.6% – the largest stand-alone contributor to the headline inflation number. Mortgage rates have soared since January 2022 as the Bank of Canada has hiked its benchmark interest rate a historic 10 times, including a 0.25% increase on July 12.

Grocery price growth, while still historically high, softened slightly, at a pace of 8.5%, down from 9.1% in June.

What the July inflation report means for Canadian borrowers

Simply put, today’s higher-than-anticipated inflation reading could throw a wrench in the Bank of Canada’s plans to end its rate-hiking cycle. While June’s 2.8% print provided optimism that inflation was starting to return to target, July’s numbers indicate that the CPI measure is proving stickier than the Bank had hoped.

In an economic report released prior to the July CPI release, Derek Holt – Vice President and Head of Capital Markets Economics at Scotiabank – wrote that a further rate increase from the central bank is still a possibility, as the economy has “not yet begun the process of opening up disinflationary slack” and that lower inflation will likely experience a lag of one to two years. Meanwhile, persistently high home prices, energy, and food inflation, along with lingering supply chain challenges, are simply putting too much pressure on the measure.

“For these reasons, it’s premature in my view to say that the BoC is done raising rates,” he writes. “It’s definitely premature to be thinking of rate cuts any time soon and I’m skeptical toward the consensus view that they begin to ease by 2024Q3 which is basically what almost everyone is guessing.”

This could mean further increases for variable rate borrowers as early as the Bank’s next rate announcement, on September 6. 

Fixed mortgage rates, meanwhile, are already experiencing heavy upward pressure as markets react to the surprise CPI reading; government five-year bond yields, which lenders use to set their fixed borrowing rates, surged this morning to 4.15% – a high not seen since 2007. Lenders are anticipated to pass those increases down via their fixed mortgage rate pricing in the days to come.

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