Canada CPI Preview: Forecasts from six major banks, inflation likely inched up in July

We look for CPI to firm 0.3pp to 3.1% as base effects push inflation back above the target range, while a rebound in services provides the main driver for the 0.4% MoM print. Core measures should edge 0.2pp lower to 3.6% YoY and break below the 3.5-4.0% range on a 3m saar basis, but we still look for +0.3% MoM from CPI-trim/median, keeping the BoC in wait-and-see mode.

YoY inflation likely edged up to 2.9%. We expect price growth excluding food and energy products to slow further too, falling to 3% YoY from 3.5% in June. 

An increase in gasoline prices could have translated into a 0.3% increase of the consumer price index in July (before seasonal adjustment). If we’re right, the 12-month rate of inflation should come up from 2.8% to 3.0%. Contrary to the headline print, the core measures preferred by the Bank of Canada should decrease in the month, with CPI-med likely moving from 3.9% to 3.6% and CPI-trim from 3.7% to 3.5%. In both cases, it would be the lowest level observed in a year and a half.

The July headline CPI print is expected to edge only moderately higher to 2.9% YoY. More important, however, will be the evolution of the core inflation measures. Those core inflation trends, when measured on a three-month annualized basis, have remained in a 3.5%-4.0% range for the past several months. Should that core inflation trend downshift to a 3.0%-3.5% three-month annualized pace, which we view as a distinct possibility, that may well be enough for the Bank of Canada to hold its policy interest rate steady at 5.00% at its early September announcement.

With gasoline prices on the rise this July, in contrast to a decline seen twelve months ago, Canadian inflation will likely look a little hotter than it did in June. Indeed, we see headline inflation accelerating to 3.1%, from 2.8%, even with a modest deceleration in food price inflation. The monthly increase in prices excluding food & energy could also look a bit hotter than in the prior two months, with the deceleration in mortgage interest costs potentially stalling and prior negative contributions to inflation from internet and telephone services unlikely to be repeated. Still, even penciling in a monthly gain in ex-food/energy prices of 0.3% on a seasonally adjusted basis, the annual rate of inflation for that core measure would still decelerate to 3.4%, from 3.6% in June.

The most important aspect of July CPI data will be the average 3-month annualized pace of core inflation, which has been persistently in a 3.5-4% range for close to a year. There is a decent chance that this measure falls below 3.5% in July as a very strong print from April drops out of the 3-month calculation. Even if core inflation does remain in the 3.5-4% range, we expect the BoC to keep rates unchanged in September given other softer data (July employment, June retail sales, and likely softer Q2 GDP) received since the July decision.