Canada’s inflation rate in July rose to three per cent from 2.8 per cent the month before as gasoline prices spiked, but economists say the Bank of Canada is likely to look past this latest reading.
Here’s what they say the data might mean for the economy and interest rates.
‘Nothing to worry about’: CIBC
The generally subdued readings for core inflation mean there’s no rush for the Bank of Canada to raise interest rates, said CIBC senior economist Andrew Grantham. He said policymakers have plenty of time to assess oil price fluctuations, how the tariff situation plays out and whether the rebound in economic activity we are currently witnessing can be sustained.
The rate, driven by higher gasoline prices and airfares, shouldn’t be a concern to policymakers at the Bank of Canada, Grantham said.
He noted that the acceleration in July could be partly unwound next month, with Statistics Canada suggesting that there was still an impact from the World Cup on fares to the U.S. in July.
The headline reading was a tick higher than consensus expectations, Grantham said, and while there’s still plenty of uncertainty regarding future oil and gasoline price moves, so far average prices in August are tracking close to July’s level, which should see headline inflation hold at or close to July’s print.
“Nothing to worry about,” he wrote on a note on Monday. Grantham said continues to forecast no change in the overnight rate until around mid-2027.
Pockets of strength will prove temporary: Capital Economics
While core prices rose at their strongest pace in almost a year in July, the key drivers were temporary factors and the annual rate remained at the Bank of Canada’s two per cent target, said Bradley Saunders, North America economist at Capital Economics.
“The key message therefore remains that a soft inflation backdrop is providing an effective counterbalance to stronger activity and labour market data with regards to the path for interest rates,” said Saunders.
He said “these pockets of strength” meant an average of the central bank’s preferred CPI-trim and CPI-median measures rose by 0.23 per cent in July – the strongest pace in almost a year. However, he said he doesn’t see cause for concern, given that most of the drivers will be temporary and the annual rate remained at the two per cent target.
Not too concerned: TD Economics
TD senior economist Leslie Preston said she expects the Bank of Canada’s core inflation measures to drift a little bit above two per cent in the coming months as higher energy costs pass through to other prices in the economy.
“We aren’t too concerned that core inflation running slightly above two per cent should spook the BoC into raising interest rates,” said Preston, adding that the impact of travel on inflation should fade.
The Bank of Canada has noted that the country continues to deal with the confidence shock of on-again-off-again tariff threats from the U.S., she said. Given there is no deal yet to avert the 50-per-cent tariffs set to come into effect on Aug. 19 this remains a clear downside risk to Canada’s economy.
Inflation to stay high in 2026: Oxford Economics
Headline inflation will likely continue to hover around three per cent year-over-year for the rest of 2026 due to sticky oil prices and rising food inflation, said Michael Davenport, senior economist at Oxford Economics.
However, that excess slack in the economy and a further deceleration in shelter inflation will likely keep core inflation near the Bank of Canada’s two per cent target this year, allowing it to stay on the sidelines, he said.
Davenport said the renewed hostilities between the U.S. and Iran suggest that a prolonged stop-start conflict with fluctuating shipping through the Strait of Hormuz is now the most likely scenario. He added that he expects this to keep the price of Brent oil in the mid-US$80 per barrel range on average for the rest of this year before easing in 2027.
Not-so-friendly CPI data: Rosenberg
Economist David Rosenberg said the improvement on the Canadian inflation front “hit a pothole” in July, with all the key measures reaccelerating and coming in a tick above expectations.
“Nothing here for the Bank of Canada to get too excited about, but at the same time, numbers that will cause them to shift back to the prior hawkish tone if we see two or three more months of above-expected data like this, especially with the domestic economy having improved beyond expectations of late,” he said.
Rosenberg said to a large extent, July’s inflation numbers were an energy story, and if you strip that out, inflation is running closer to 1.8 per cent than 3 and core, at 1.6 per cent rather than 1.9 per cent.
The Bank of Canada should take that as a sign that there is no real spread from energy to the rest of the pricing system, he said.
“I am sure that the bond bears and policy hawks on Bay Street will be howling that the BoC is behind some fictitious curve — my advice is to tune them out,” said Rosenberg.
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