Canada: Headline CPI Head Fake Masks Cooling under the Hood

While a reacceleration in headline CPI inflation in July was widely anticipated, today’s print blew the doors off economists’ forecasts. A couple of idiosyncratic factors drove the gain, including a sharp increase in Alberta electricity prices and higher monthly prices for travel tours. Base effects also influenced gasoline prices, as a sharp monthly decline in July 2022 impacted the year-over-year growth rates.

However, looking under the hood, there was some good news on the inflation front. The Bank’s preferred measures of core inflation—CPI median and trimmed mean—slowed slightly on a year-over-year basis. Looking to the 3-month annualized change in these measures, there was a further cooling in underlying inflation in the month (graph). Meanwhile, the central bank’s newest measure of core inflation—core services excluding shelter—also slowed meaningfully in July (to 4.2% annualized from 4.6% in June).

July’s headline inflation print stands in contrast to the relatively weak macroeconomic data over the past few weeks. Indeed, real GDP, employment and international trade all suggested the long-anticipated cooling of the Canadian economy may have finally arrived. We’re tracking real GDP growth of around 1.25% annualized in Q2 and 0.75% in Q3. This is well below the Bank’s forecasts of 1.5% Q2 and Q3, respectively, published in the July 2023 Monetary Policy Report. When combined with the deceleration in the 3-month annualized core inflation numbers, this reinforces our call that the Bank of Canada is likely to remain on hold at its September meeting, barring any major data surprises.