Inflation at 7.6% in July | “A step in the right direction”, but it is still “far too high”

Canada’s inflation rate slowed to 7.6% in July, down from the 8.1% rate measured in June.

Martin Vallieres
The Press

In Quebec, the inflation rate fell to 7.3% in July, compared to the 8% rate measured in June.

According to Statistics Canada, the deceleration in inflation is mainly attributable to the drop in gasoline prices from June to July.

Excluding gasoline, prices for consumer goods and services, particularly food and beverages, rose another 6.6% year over year in July, after rising 6.5% in June.

Economists say this indicates that upward pressures on overall prices remained widespread in July.

Consequently, this decline in inflation promises to be insufficient to dissuade the Bank of Canada from continuing its sharp rise in interest rates.

“For the first time since June 2021, the annual inflation rate is lower than the previous month. But this is not the time for complacency,” warns Royce Mendes, Managing Director and Head of Macroeconomic Strategy at Desjardins.

“Despite the slowdown in inflation, it remains far too high, and price growth remains widespread. In July alone, more than 75% of the components of the basket [de l’indice des prix à la consommation ou IPC] increased by more than 3% on an annual basis, and more than half increased by more than 5%. »

“Canadian consumers and businesses may consider July’s report of lower inflation as good news, but they still need to factor in the implications of even higher prices,” said Kiefer Van Mulligen, an economist at Conference Board of Canada.

At BMO Capital Markets, Chief Economist and Managing Director, Douglas Porter, believes that “this inflation report is clearly a step in the right direction”, but that “the journey [vers la cible de la Banque du Canada] looks like it will be a long time yet”.

“The Canadian economy may finally be past peak inflation, provided oil prices don’t go crazy again. But it is also likely that inflation will remain stable at around 8% by the end of this year before really falling in 2023,” he adds.

Foods still on the rise

Meanwhile, what’s so catchy about this report of a decline in inflation?

At the National Bank, economists Jocelyn Paquet and Alexandra Ducharme summarize their observations as follows.

“Headline inflation decelerated in July, as expected, largely on the back of lower monthly gasoline prices [de juin à juillet] “, they write in a note to clients of the National Bank.

“Other categories also contributed to the decline, such as transportation – the biggest monthly drop since April 2020 – as well as clothing and footwear, the biggest monthly drop since September 2020.”

On the other hand, underline the National Bank’s economists, “food prices continued to climb in July to reach their biggest annual gain since 1982. Also, rents recorded another strong monthly increase which resulted in a annual gain of 4.9%, the largest since 1989”.

Rate hikes?

In this context, what are the prospects for the continuation of the interest rate hike by the Bank of Canada?

From the perspective of Royce Mendes at Desjardins, “when you exclude food and energy, inflation [fondamentale] remains almost three times higher than the Bank of Canada’s 2% target. Thus, he “remains of the opinion that it will raise its rates by 50 basis points in September”.

At TD Bank, Senior Economist Leslie Preston is “encouraging that headline inflation moved in the right direction in July”.

But given that “measures of core inflation have still advanced at a rate above 5%”, the economist believes that “the Bank of Canada still has work to do to reduce inflationary pressures”.

“So I expect it to continue to raise its key rate by at least 50 basis points [0,5 point de pourcentage] in its next announcement in three weeks,” says Ms.^me Preston.

At the National Bank, economists Jocelyn Paquet and Alexandra Ducharme also note that “although [les données de juillet] suggest that the worst is behind us, inflation remains too high. This should prompt the Bank of Canada to hike 75 basis points [0,75 point de pourcentage] its key rate in September.

Nevertheless, they anticipate that “it will get complicated later” for the Bank of Canada, while “economic growth should slow with the reduction in demand and the weakening of the real estate market”.

In this context, estimate the economists of the National, “another tightening of the monetary policy [hausse de taux] could prove counterproductive, which leads us to believe that the Bank of Canada will pause [après la hausse de septembre] to measure the effects of the measures taken so far”.