July Inflation Drops to 1.7%: What It Means for Consumers

Economists are finding some encouraging signs in Canada’s latest inflation figures, but many caution that the Bank of Canada may still need clearer evidence before moving to cut its key interest rate next month.

Statistics Canada reported the annual inflation rate fell to 1.7% in July, down from 1.9% in June. The July reading was slightly below the consensus forecast by about one-tenth of a percentage point.

A large factor in the drop was a 16.1% year-over-year decline in gasoline prices, driven largely by the removal of the consumer carbon price earlier this year. That policy change substantially reduced fuel costs compared with the same month a year ago.

BMO chief economist Doug Porter described July’s consumer price index as a “relatively favourable” report, while noting persistent pressure in grocery prices and shelter costs.

Economists split on how July inflation may affect BoC’s next rate decision

July’s CPI release is the first of two inflation reports the Bank of Canada will review before its next policy announcement on Sept. 17. The central bank left its policy rate unchanged at 2.75% in July.

The Bank has been watching how trade tensions and tariffs are influencing prices, and it pays particular attention to measures of core inflation that exclude temporary or volatile items like tax changes, energy and seasonal swings.

Statistics Canada said the Bank’s preferred core measures remained close to 3% in July, a level that underscores why policymakers are cautious about easing monetary policy too quickly.

Porter pointed out, however, that an alternate core indicator which excludes food and energy came in lower—around 2.6%—in July. On balance, he said the July CPI “slightly turned the dial” toward the possibility of a rate cut in September, consistent with BMO’s outlook.

Financial markets modestly revised the odds of a quarter-point Bank of Canada cut in September to roughly 40% as of Tuesday afternoon, according to LSEG Data & Analytics.

Even so, with core inflation still elevated relative to the headline rate, Porter called the prospect of a September cut “a long shot.” He added that the Bank will likely want to see more favorable inflation readings and probably softer employment data before acting.

CIBC senior economist Andrew Grantham emphasized that the persistence in core inflation largely reflects base-year effects—the impact of price movements from the previous year on annual comparisons. On a shorter rolling basis, three-month annualized core inflation for July was closer to 2.4%, he noted.

Grantham said additional data arriving before the Bank’s Sept. 17 decision will be important, but he still expects a quarter-point cut in September.

RBC, by contrast, remains cautious and continues to forecast no further rate cuts from the Bank of Canada this year. RBC senior economist Claire Fan said the monthly rise in core inflation was smaller than she had anticipated, but she stressed that price pressure remains broadly distributed across the consumer price index.

What contributed to July’s inflation rate?

Grocery price inflation accelerated in July, rising to 3.4% year-over-year from 2.8% in June. Several food categories showed sharp increases and were important contributors to the overall rise in consumer prices.

Confectionery prices climbed 11.8% year-over-year, while coffee prices surged by 28.6%—one of the largest single drivers of food inflation in July. Statistics Canada attributed higher costs to poor growing conditions in some cocoa- and coffee-producing regions.

Fresh fruit prices also rose, with fresh grapes up nearly 30%, lifting the fresh fruit index to a 3.9% annual increase in July, compared with 2.1% in June.

Porter acknowledged that Canada’s tariff dispute with the United States may be contributing to some higher food costs, but he emphasized that a number of global factors—such as climate-driven crop shortages—are the dominant forces behind recent price moves for coffee, chocolate and beef.

Durable goods inflation has shown some “stickiness,” particularly in motor vehicles. Porter said tariffs and trade disruptions, including U.S. duties on vehicles, have created spillover effects that raise auto prices in Canada. Since autos represent a substantial portion of the CPI basket, those import-related cost pressures matter for headline inflation.

Shelter inflation edged up to 3.0% in July from 2.9% in June, the first increase in the category since February 2024. Rent growth picked up in July, notably in Prince Edward Island, Newfoundland and Labrador, and British Columbia, even as lower mortgage costs continue to moderate total shelter inflation.

Natural gas prices fell year-over-year in July, but the decline was smaller than in June, owing in part to higher regional costs in Ontario.

Porter described the persistence in shelter inflation as frustrating for those hoping for faster disinflation, but he noted market indicators show rents declining in some major cities. He expects shelter-related inflation to ease further through the remainder of the year.

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