Inflation hits 3% in July, upper end of BoC target

Higher gasoline prices helped push the country’s annual inflation rate in July to its highest reading since September 2011, Statistics Canada said Friday.

The federal agency said the consumer price index for July was up 3% on a year-over-year basis, up from a 2.5% increase in June.

Economists had expected a year-over-year inflation rate of 2.5%, according to Thomson Reuters Eikon.

The result put inflation at the upper end of the Bank of Canada’s target range of 1 to 3%.

Earlier this summer, the Bank of Canada predicted inflation to move as high as 2.5%—due to temporary factors like higher gas prices—before it settles back down to 2% late next year.

The Bank of Canada can use interest rate hikes as a tool to help prevent inflation from climbing too high. The central bank raised its trend-setting interest rate to 1.5% earlier this summer.

Some of the gains in prices in July (food prices, for example) may prove temporary, said Andrew Grantham, senior economist at CIBC Capital Markets, in Friday commentary.

“Today’s figures will likely support the [loonie] and result in increased speculation that the Bank [of Canada] could hike again as early as September, [but] we continue to lean toward October for the next move,” he said.

The Canadian dollar rose more than half a cent to US$76.50 Friday morning after the inflation report was released.

The average of Canada’s three measures of core inflation, which leave out more-volatile data like pump prices and are closely watched by the central bank, rose last month to 2% compared with 1.96% in June.

Read: Economy grows by 0.5% in May, beating expectations

All eight major components of the consumer price index rose on a year-over-year basis in July with the transportation index being the largest contributor with an 8.1% increase.

A 25.4% increase in the price of gasoline and a 28.2% increase in the cost of air transportation compared with a year ago helped push overall prices higher.

Food purchased from restaurants also gained 4.4%, while mortgage interest costs rose 5.2%.

On the flip side, telephone service costs were down 5.1% and traveller accommodations slipped 4.1% compared with a year ago.

James Marple, senior economist at TD, also expects little from the BoC until October. “The relative stability of core inflation measures may give the Bank of Canada some solace,” he said in commentary. “Still, with an economy beating expectations and a range of indicators pointing to limited excess capacity, maintaining stable inflation is likely to require further rate hikes by the central bank […].”

BMO strategist and expert Benjamin Reitzes also noted in his Friday report that core inflation remained at 2% and that one month does not make a trend.

“Overall, this report barely moves the needle for the September policy meeting (if at all), as there’s no need to shift away from the gradual tightening stance noted in July,” he said.

Also read:

Manufacturing sales rise 1.1% in June, boosted by oil and coal

Housing starts decline in July after busy June: CMHC