Canada: July Inflation Was Muddied by a Multitude of Factors

Again, in July, the ever-evolving conflict in the Middle East drove headline inflation higher, raising the price at the pump just in time for the summer driving season (graph 1). Gasoline prices rose 25.7% y/y compared to July 2025, after slowing to a still elevated 20.5% pace in June. This caused aggregate energy prices to accelerate to a 16.6% pace in July from 14.3% the prior month, albeit still below the roughly 20% pace seen in March and April. 

Even when energy is excluded, elevated transportation prices continued to rear their ugly head in July. Higher jet fuel costs contributed to a 12.0% y/y advance in the price of air transportation, up from 9.6% a month earlier. This compounded the sharp increase in the cost of travel tours thanks to the higher price of hotels and flights to US cities hosting World Cup matches in the month. Consequently, prices for travel tours rose at a faster pace in July (15.2%) compared with June (6.8%). Providing a modest offset to this inflationary tailwind were food costs, as prices for food purchased from stores posted the slowest advance since June 2025 (graph 2). A deceleration in the growth of prices of fresh vegetables, chicken and cereal products were primarily responsible for the slowdown.

Turning to underlying inflation, the average of the Bank of Canada’s preferred measures of core inflation—CPI median and trimmed mean—edged up slightly in July to around 2.0% y/y from 1.9% in June. Meanwhile, the annualized seasonally adjusted 3‑month moving average of the Bank’s preferred measures jumped from 1.7% in June to 2.0% last month (graph 3). Taken together, this points to some possible modest upward pressure to still well-contained underlying inflation.

While Canadian CPI inflation accelerated by most measures in July, the numbers are muddied by factors including higher headline energy prices and the impact of the World Cup. As such, even the acceleration in near-term underlying inflation should be taken with a grain of salt. A return to typical summer sports activities in North America and lower average oil prices in August could cause headline inflation to dip below 3% in the month, albeit remaining near the top end of the Bank of Canada’s operating range. That said, with trade tensions with the US still high and threatened tariffs External link. on 5% of Canadian exports to the US possibly coming into effect on August 19, downside risks to inflation remain a going concern. Consequently, we expect the Bank to remain on hold throughout 2026 as it continues to balance this two-sided risk.