Canada Inflation Shows Signs of Pickup in July: Key Takeaways

(Bloomberg) -- Canadian consumer prices showed some signs of life last month, Statistics Canada said Friday in a report that should bolster policy makers’ confidence inflation is trending higher from extremely low levels.

Annual inflation accelerated to 1.2 percent in July, in line with economist expectations, after falling to an almost two-year low of 1 percent in June. The report also showed a second straight gain in core inflation.

Canadian inflation data is being closely monitored by investors as they try to gauge the likelihood of another rate increase this year. The Bank of Canada is expected to continue on a rate hike path, but only as long price pressures hold up.

Canada Inflation Shows Signs of Pickup in July: Key Takeaways

Key Points

  • The clearest sign that the recent weakness in prices has at least bottomed out are the rising key core inflation readings. The average of the Bank of Canada’s three core inflation measures was 1.5 percent, rising from a 1.4 percent pace in June and a 1.3 percent reading in May that was the slowest since 1999
  • Higher gasoline prices -- which were up 4.6 percent over the 12-month period -- were the major factor behind the rise in overall inflation. Excluding gasoline, headline inflation actually slowed to 1.1 percent, from 1.2 percent in June
  • Other major contributors to inflation were homeowner replacement costs (up 4.1 percent), traveler accommodation (8.5%) and food purchased from restaurants (2.6%)
  • Legislated changes to electricity prices in Ontario are acting as the biggest drag to inflation. Canada’s electricity index fell 9.1 percent in July from a year earlier, which was the biggest decrease since April 2003. The lower electricity prices cut about 0.2 percentage points from national headline inflation, a bit more than the upward contribution of higher gasoline prices.

Big Picture

Bank of Canada Governor Stephen Poloz raised interest rates for the first time in seven years on July 12 and said inflation that’s being held down by temporary factors will move back towards his 2 percent target. The Governor also said future policy moves depend on fresh data that informs the inflation outlook.

Market Reaction

Canada’s dollar appreciated after the report, rising 0.6 percent to C$1.2611 against its U.S. counterpart at 8:35 a.m. Toronto time.

Other Details

  • For the three so-called core measures, the ‘common’ core rate was 1.4 percent, the ‘median’ core rate was 1.7 percent and the ‘trim’ measure was 1.3 percent
  • On the month, consumer prices were unchanged, as forecast. On a seasonally adjusted basis, the price index rose 0.2 percent on the month.