Canadian Inflation Heated Up in July  

• Headline CPI inflation ticked up slightly further than markets were expecting to 3.0% year-on-year (y/y) in July, from 2.8% in June, thanks to high gasoline prices.  That was one tick higher than markets were anticipating.
• Prices at the pump rose 25.7% y/y in July, compared with 20.5% in June. Price pressures at grocery stores cooled further, with prices for food purchased from stores up 3.1% in July, down from 3.9% y/y in June.
• Shelter inflation cooled further in July to 1.3% y/y from 1.5% y/y in June. Homeowners’ replacement costs are down 2.1% versus a year ago, which Statistics Canada cites as the main category exerting downward pressure on Canadian inflation.
• Services inflation ran hotter at 2.5% y/y, driven by higher travel-related costs. The effects of the World Cup showed up in prices for travel tours, which were up 15.2% y/y on more expensive flights and hotels in U.S. cities hosting World Cup games. Higher jet fuels costs are also contributing to increased airfares which were up 12% y/y in July, relative to 9.6% in June.
• The Bank of Canada’s preferred core inflation metrics (median and trim) averaged 2.0% in July versus 1.9% in June.

Key Implications

• Inflation ticked up slightly in July due to due to higher prices at the pump and higher travel-related costs due to the World Cup. Core inflation remained bang on the Bank of Canada’s 2% target. We expect the Bank of Canada’s (BoC) core inflation measures to drift a little bit above 2% in the coming months on some pass through of higher energy costs to other prices in the economy.
• Short-term Government of Canada bond yields are up slightly on the higher inflation read, but given the travel impact on inflation should fade in the coming months, we aren’t too concerned that core inflation running slightly above 2% should spook the BoC into raising interest rates. The BoC has noted that Canada continues to deal with the confidence shock of on-again-off-again tariff threats from the U.S., which given there is no deal as yet to avert the 50% tariffs set to come into effect on August 19th, remains a clear downside risk to Canada’s economy.