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Bank of Canada won’t be pleased with July inflation data, but rate hold still expected

The Bank of Canada is anticipated to be dissatisfied with the inflation figures for July, which have come in higher than expected. According to Statistics Canada, the annual headline inflation rate increased by 3.3% in July, surpassing economists’ projected 3% rate. This rise follows the previously reported rate of 2.8% in June.

The unexpected increase in inflation is primarily attributed to base-year effects, including a significant monthly drop in gasoline prices in July 2022, along with a substantial 127.8% year-over-year surge in electricity prices in Alberta. On a monthly basis, the Consumer Price Index (CPI) saw a 0.6% uptick in July, following a 1% rise in June.

Meanwhile, the Bank of Canada’s preferred gauges of core inflation, which exclude volatile energy costs, experienced slight moderation. The three-month annualized change in CPI-median and CPI-trim dropped slightly to +3.6% and +3.4%, respectively.

Mortgage interest costs remain the top contributor to inflation

The Bank’s newest measure of core inflation, core services excluding shelter, also eased during the month, declining from 4.6% in June to 4.2%.

The index for mortgage interest costs continues to be the primary contributor to inflation. Statistics Canada noted that this index reached a record high of +30.6%. Excluding the impact of the mortgage interest cost index, headline inflation for July would have been 2.4%.

Bank of Canada likely to hold rates in September

Despite the unexpectedly high inflation reading, economists believe that other economic indicators point to a slowing economy. They predict that these indicators will be enough to keep the Bank of Canada from making any changes to interest rates at its upcoming policy meeting in September.

Randall Bartlett from Desjardins noted that the strong headline inflation in July contrasts with the weak macroeconomic data of recent weeks, including GDP, employment, and international trade data. He suggested that these factors, coupled with the deceleration in three-month annualized core inflation, support the expectation that the Bank of Canada will likely maintain its current stance in September, unless significant data deviations occur.

BMO’s Douglas Porter agreed, acknowledging that the inflation report is unfavorable for the Bank of Canada. Despite this, he emphasized that the recent rise in unemployment rates and signs of reduced spending could prompt the Bank to remain cautious and refrain from further rate changes, even though the inflation figures could complicate the decision-making process.

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