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Canada's inflation rate slows in July, but food prices continue to rise

Wage growth is lagging inflation, says one analyst, but another points out that consumer spending is still strong
Inflation, growth of market basket or consumer price index concept. Shopping basket with foods on arrow. 3d illustration

Canada's year-over-year inflation rate slowed to 7.6% in July, with the deceleration largely driven by a decline in gas prices even as prices for food, rent and travel continued to rise.

Economists had pointed to the nearly 40-year-high of 8.1% in June as a likely peak to the overall inflation rate, which had previously increased every month since June 2020.

Though gas prices rose 35.6% in July compared to a year earlier, that was down from a whopping 54.6% increase in June, Statistics Canada reported Tuesday. Still, Canadians are feeling the pinch from inflation as food costs were up 9.9% compared with a year ago, the fastest pace since August 1981.

In a further indication that price gains are slowing, the agency said July's month-over-month increase was the smallest since December 2021.

The trend also echoes the most recent inflation data out of the United States, which saw the rate of price increases drop to 8.5% in July from 9.1% the previous month—also due in large part to a drop in prices at the pump.

Americans are still absorbing bigger price increases than they have in decades, with rising prices for groceries, rental housing and medical care costs.

Tu Nguyen, an economist with accounting and consultancy firm RSM Canada, said the "pervasiveness" of inflation across the economy means there's still a ways to go before pressure on Canadians' finances eases substantially.

"It will be a while until households can breathe a sigh of relief. Wage growth continues to lag inflation, resulting in households losing purchasing power," Nguyen said in a note.

Average hourly wages rose by 5.2% in July compared with a year ago.

The agency said the downward pressure on prices at the pump was due to a combination of factors, including ongoing concerns related to a slowing global economy, increased COVID-19-related public health restrictions in China and slowing demand for gasoline in the United States.

Still, inflation is well above the Bank of Canada's 2% target.

The central bank is watching the latest reading of inflation as it gears up to make its next interest rate announcement on Sept. 7, when it is expected to raise its key rate by three-quarters of a percentage point.

Though it appears to have peaked, inflation remains too high, Bank of Canada governor Tiff Macklem said in an op-ed published by the National Post on Tuesday, emphasizing that the central bank must take action to cool things further.

"Our goal is to cool the economy enough to get inflation back to the 2% target," he said.

"We don't want to choke off demand—we want to slow its growth. That's what we call a soft landing. By acting forcefully in raising interest rates now, we are trying to avoid the need for even higher interest rates and a sharper slowing down the road."

The central bank is paying closer attention to the core measures of inflation, which are less volatile than the headline number _ and have remained relatively unchanged since June, said TD Chief Economist Beata Caranci.

Consumer spending has been relatively strong in Canada despite high inflation, she said, with consumer spending in the first half of the year rising at twice the pace as the U.S.

"You need the higher rates and the inflation to cause people to slow down their spending patterns, which, in fact hasn't happened to that greater degree," she said.

University of Calgary economics professor Trevor Tombe said it's unlikely that the latest inflation data will change the Bank of Canada's plans when it comes to its next rate decision, noting there's a lag between interest rate decisions and their effect on the economy.

Among food items that have gotten considerably more expensive, goods are up 13.6% since last year amid higher input costs as the Russian invasion of Ukraine continues to put upward pressure on wheat prices. The prices of other food products also rose faster, including eggs, which are up 15.8%, and fresh fruit, up 11.7% since last year.

As mortgage costs increase with higher interest rates, the report notes rent prices are accelerating, rising faster in July than the previous month.

With more Canadians travelling during the busy summer season, airfares rose by around 25% in July compared with the previous month. Traveller accommodation prices rose by nearly 50% since a year ago, with the largest price increases in Ontario.

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