Canadian inflation up slightly in July

Canadian consumer prices, as measured by the consumer price index (CPI), rose 1.3% year-on-year in July, after gaining 1.0% in June. Core inflation (excluding the eight most volatile components) was up 2.4% relative to last July (June: 2.3%).

"Prices advanced on year-on-year basis for seven of the eight main components of the index. Food prices, which rose 3.2% in July, continue to be buoyed by the rising cost of meat, which was 6.1% higher, year-on-year, in July. Clothing and footwear prices increased 1.3% in July (June: 0.3%)",says TD Economics.

Transportation was the one sub-index to see price declines in July, down 1.7% year-on-year. The declines were largely the result of gasoline prices, which were 12.2% lower than twelve months ago. The energy index was down 7.4% year-on-year in July, and continues to weigh on headline inflation. However, this effect has moderated through the past three months, as the effects of past price movements work their way through the index.

Looking across the provinces, prices were up in all provinces by Prince Edward Island. Saskatchewan led the pack, with prices rising 1.9% in July, followed by Ontario (1.5%) and Alberta (1.3%). Prince Edward Island's CPI fell on a year-on-year basis for the eighth consecutive month, reflecting the relatively larger weighting of energy products in the provincial index.

July marked the third consecutive month of rising inflation, as the effect of energy prices continues to attenuate. With output likely to have contracted in the first half of the year however, all eyes remain focused on the Canadian economy. Today's inflation report will have little direct bearing on the growth story for the second half of the year, where a recovery is anticipated, led by exports.

Inflation has traditionally been more important for monetary policy, with core inflation considered a "guide" to the future level of inflation. With twelve straight months of core inflation above the Bank of Canada's 2% target, it seems that this importance has diminished. Indeed, the Bank of Canada has shifted its focus to what it calls "underlying inflation" - an effectively unobservable series which removes special factors, such as exchange rate effects, from core inflation. In the July Monetary Policy Report, the Bank of Canada estimated underlying inflation to be in the 1.5% to 1.7% range, below the 2% target. With underlying inflation low and real GDP growth expected to resume in H2 (following a contraction in H1).

"The Bank of Canada appears to be in a "sweet spot" presently, with the July interest rate cut providing the needed boost to the growth outlook. As a result, we do not expect the Bank of Canada to move the policy rate until the second half of 2017", notes TD Economics.