Behind the headline

Sure, the headline numbers from Canada's July consumer prices report look good. StatsCan reported this morning that the year-on-year rise in headline CPI slipped to 7.6 percent in the month from 8.1 percent in June, breaking a year-long streak of ever-higher inflation. The month-on-month increases -- 0.1 percent unadjusted, 0.3 percent seasonally adjusted -- were the smallest since December 2021. 

All well and good, but you only have to read as far as the second sentence of the press release to realize that there may be less to this improvement than meets the eye: "The deceleration was a result of slower year-over-year growth in gasoline prices". That bald statement of fact says it all: aside from the fall in the price of gasoline, it is difficult to spot much really encouraging news in this report. 

Gasoline prices fell 9.2 percent in July, dropping the year-on-year increase in this key component to 35 percent from the alarming 55 percent recorded in June. However, a quick glance at most of the other measures in StatsCan's summary table makes it clear that price pressures remain broad-based. In particular, food prices actually accelerated on a year-over-year basis in July, rising 9.9 percent after a 9.4 percent rise in June. Excluding both food and energy, prices rose 5.5 percent year-on-year in July, well above the Bank of Canada's 2 percent target.

The special aggregates developed by the Bank to monitor core inflation trends also offered little solace. Two of the three measures rose in July; all three are now at or above 5 percent, with the mean reading edging up to 5.3 percent. 

Even with all these caveats, it seems likely that the peak of the current inflation spike has passed, but the headline rate will decline only slowly from here. Gasoline prices may have slid in July, but they continue to fluctuate wildly on a daily basis, making it hard to get a handle on how the August index may be affected. Looking further ahead, natural gas prices may well supplant gasoline as the top-of-mind concern for Canadians as the colder weather approaches: the year-on-year increase for natural gas in July, at 42 percent, was actually higher than the increase for gasoline.  

It seems clear that the Bank of Canada will raise rates again at its next Governing Council meeting in September, but a 50 basis point move seems more likely than the much bigger increases seen in recent times.  There are still no signs of an emerging wage-price spiral, with the rise in wages, at 5.2 percent, lagging far behind CPI. Moreover, the Bank's tightening up to this point has put the housing market sharply into reverse, with both sales activity and prices falling sharply. By further undermining the housing market, aggressive rate hikes from here could seriously damage consumer confidence. That would make the soft landing for the economy that is the Bank's stated goal all but impossible to achieve.