Canada’s Inflation Picture: A Tale of Two Trends

Canadian consumers and policymakers are watching closely as new inflation data is set to be released. While the annual inflation rate is expected to show a welcome slowdown, monthly figures suggest that underlying price pressures may be gaining steam. This dual trend presents a complex challenge for the Bank of Canada (BoC) as it navigates its monetary policy decisions.

Statistics Canada is scheduled to release the Consumer Price Index (CPI) for July, a key piece of information that will help the BoC determine its next moves on interest rates. According to economists, the annual headline inflation rate is projected to dip to 1.7% in July, a decrease from the 1.9% recorded in June. This would be a positive sign that efforts to curb inflation are having an effect. However, a closer look at the data reveals a different story on a monthly basis, with inflation expected to rise by 0.4%, indicating that price increases are still occurring at a notable pace.

Beyond the headline numbers, the Bank of Canada will be particularly focused on its core inflation measures, which exclude volatile food and energy costs. In June, this key indicator was up 2.7% year-over-year and 0.1% month-over-month. The BoC’s preferred gauges, the trim mean and trim median, have shown signs of being “sticky” and have been a source of concern for Governor Tiff Macklem and his team. Macklem acknowledged this in a recent press conference, noting that while the central bank is keeping its benchmark rate steady for now, these indicators will be monitored closely.

The inflation outlook is further complicated by external factors, particularly the potential for new U.S. tariffs to spark domestic price increases. This uncertainty is leading both markets and policymakers to adopt a cautious stance. While some factors like a stronger Canadian Dollar, slowing wage growth, and a contracting economy may help ease inflation, the recent acceleration in core measures suggests the path forward is anything but clear. As the market reacts to the headline number, policymakers will be dissecting the nuanced data to fully understand Canada’s evolving inflation landscape.