Consumer price inflation ticked up slightly in July to a still-modest 1.2% year-on-year pace (June: 1.0%). On a month-on-month, seasonally adjusted basis, prices rose 0.2%.  

In a reversal from June, goods price inflation ticked up a bit, albeit to barely above 0%, on the back of swings in energy prices.  Conversely, services inflation, at 2.1% year-on-year, remains the driver of overall price growth, but decelerated somewhat from June’s 2.4% reading.

Two of three Bank of Canada core inflation measures ticked up in July. CPI-median rose to 1.7% from 1.6% previously, while CPI-trim was also a tick higher, at 1.5%. The CPI-common measure of inflation was at an unchanged pace of 1.4% in July.

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Key Implications

Canadian inflation may still be modest, but is showing some signs of moving in the “right” direction vis-à-vis the Bank of Canada’s 2% inflation target. After months of deceleration, tick-ups in energy costs (on a year-on-year basis) helped deliver a small gain in price inflation in July. One month is hardly a trend, but the modest increases in the Bank of Canada’s core measures provides some hope that inflation may have turned a corner.

The Bank of Canada has indicated that it will continue to monitor inflation data closely, but given that today’s report is more or less in line with their expectations for soft (but rising) inflation in the back half of 2017, no change in Governor Poloz’s thinking is likely to result. The Bank views the recent inflationary weakness as temporary, and expects recent economic strength to translate into inflationary pressures next year. 

Monetary policy is not set for the inflation you have now, but for the inflation you expect to have down the road. Absent a significant economic shock or a significant change in thinking (and communication), it thus remains likely that the Bank of Canada will follow through with another 25bp increase in their overnight policy interest rate this fall.


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