Canadian CPI marginally hotter than expected, but 2026 hikes still unlikely
Canada’s July CPI report showed prices rising a little faster than markets had anticipated pre-release, with annual headline inflation reaching 3.0% YoY.
That is 0.1pp above analyst consensus, and 0.2% up on June’s print, placing inflation at the top of the BoC’s tolerance band. Still, we remain sceptical that the BoC will tighten policy in 2026, albeit this is now a rising risk to our baseline.
As we see it, underlying inflation measures suggest that inflationary pressures remain contained for the time being.
Granted, core-median price growth rose from 1.9% to 2.0% YoY, against expectations for an unchanged print. But core-trim was unmoved at 1.9% in July after the June figure saw a 0.1pp upward revision. In any case, both the BoC’s preferred measures of underlying price growth remain at or below the Bank’s 2% target pace, with CPI ex-food and energy also seen rising 1.9% YoY.
While this mix halts recent disinflation progress, that represents price growth stabilizing where it should, rather than the start of a clear rebound.
Indeed, we see good reason to think that this disinflation pause could prove temporary. Higher gasoline prices, driven by a resurgence in global oil prices, underpinned much of the headline strength seen in July. As noted by Statscan, after excluding just this single component, inflation would have remained unchanged at 2.2%. Also flagged was a sharp rise in airfares and travel services costs, attributed to a boost from the FIFA World Cup. Both of those factors should prove temporary, reversing in coming months.
In short, we see little reason for the Governing Council to overreact to these numbers, given the impact of erratics and temporary factors.
Even if July does mark the start of a rebound, that is only likely to become apparent over several more months of data. Thus, a 2026 rate increase still looks improbable, with a high bar for data to prompt a near-term dose of tightening. But that risk has increased following today’s numbers, explaining the modest loonie outperformance post-publication.