Canada July CPI: the sky is falling!

Spoiler alert: no, it isn't.  The headline number in the data released by Statistics Canada today is certainly surprising, but a peek into the details of the data suggests that the underlying downward trend in consumer inflation remains intact. 

The headline number, and the only one the media can be bothered to look at, was assuredly way worse than expected. Year-on-year headline CPI rose 3.3 percent in July, up from 2.8 percent in June. On a month-to-month basis headline CPI rose 0.6 percent (unadjusted), compared to a consensus expectation of 0.3 percent.

There are a lot of moving parts behind that number -- so many, in fact, that the StatsCan press release manages to be quite confusing. For example, within the first few paragraphs we read first that Acceleration in headline consumer inflation was mainly attributable to a base-year effect in gasoline prices and then that The mortgage interest cost index (+30.6%) posted another record year-over-year gain and remained the largest contributor to headline inflation.  Both statements are factually accurate, but they could undoubtedly have been better expressed or at least less closely juxtaposed. 

As the first of those two quotes may suggest, the famous "base effect" continues to bedevil the statistics. For the past year your blogger and others have been cautioning that the steady decline in headline year-on-year CPI owed a lot to big monthly inflation numbers from early 2022 falling out of the index. That process is at an end, making further progress toward the Bank of Canada's 2 percent target more difficult. Specific to the July data, StatsCan is pointing out that in July 2022 gasoline prices fell 9.2 percent, whereas in June this year they edged up 0.9 percent. That creates a very powerful base effect that biases the whole index higher.

As for the mortgage cost index, all that can really be said (again) is that Bank of Canada rate hikes are a major contributor to the above-target headline CPI.  Excluding mortgage costs, the year-on-year rise in CPI for July was 2.4 percent, within hailing distance of the Bank's target.  One interesting aside: "CPI excluding mortgage costs" is not one of the regular raft of "special aggregates" that StatsCan tabulates each month, which suggests that nobody at the agency ever expected the current situation to arise.

Speaking of special aggregates, the Bank of Canada's three favoured measures of core inflation continue to head in the right direction. The mean level of those measures edged down by 0.1 percentage points in the month and now stands at almost exactly 4 percent. 

What does this mean for the Bank of Canada's next rate decision in early September? The Financial Post headlined its report on today's data this way: "Hotter-than-expected inflation turns up heat on Bank of Canada".  But does it really?  If the Bank were to hike rates on the basis of today's headline number, it would in effect be reacting to the fact that gasoline prices fell sharply in July 2022, because that's what caused the jump in headline CPI we witnessed today. That doesn't seem very likely.