OTTAWA - Economists are expressing mixed opinions regarding the Bank of Canada's potential interest rate cut following the latest inflation data. Statistics Canada reported that the annual inflation rate decreased to 1.7 percent in July, down from 1.9 percent in June. This figure was slightly below the expectations of many economists.

The decline in inflation was largely driven by a 16.1 percent drop in gas prices, attributed to the removal of the consumer carbon price earlier this year. Doug Porter, chief economist at BMO, described the July consumer price index as a "relatively favorable report," despite ongoing challenges in grocery and housing prices.

The July consumer price index is the first of two inflation reports the Bank of Canada will review before its next interest rate decision on September 17. The central bank maintained its policy rate at 2.75 percent in July. The Bank is closely monitoring how Canada’s tariff disputes are impacting inflation, particularly focusing on core inflation trends that exclude volatile items like food and energy.

Statistics Canada indicated that the Bank's preferred measures of core inflation remained around three percent in July. Another core inflation measure, which excludes food and energy, was reported at approximately 2.6 percent. Porter noted that the July CPI report has slightly shifted expectations toward a potential rate cut in September, aligning with BMO's outlook.

Financial markets have increased the odds of a quarter-point rate cut in September to about 40 percent. However, Porter cautioned that the elevated core inflation compared to the headline figure makes a rate cut a "long shot" at this stage. He stated, "We need some help in the inflation numbers. We probably need a relatively sluggish jobs number as well."

CIBC senior economist Andrew Grantham pointed out that the persistent core inflation can be largely attributed to the base-year effect, which distorts annual inflation comparisons due to last year's price movements. He noted that the three-month core inflation readings now show an annualized rate of 2.4 percent for July. Grantham believes the July inflation figures support his call for a quarter-point cut in September, although he acknowledged that more data is needed before the Bank's decision.

In contrast, RBC is holding firm on its prediction that there will be no further interest rate cuts from the Bank of Canada this year. Claire Fan, a senior economist at RBC, remarked that the monthly increase in core inflation was less than anticipated. However, she noted that inflationary pressures are still widespread across the consumer price index.

Food inflation from grocery stores rose to 3.4 percent annually in July, up from 2.8 percent in June. Significant contributors to this increase included an 11.8 percent rise in confectionery prices and a 28.6 percent increase in coffee prices. Statistics Canada attributed these higher costs to poor growing conditions in cocoa and coffee-producing countries. Additionally, fresh grape prices surged nearly 30 percent, contributing to a 3.9 percent increase in overall fresh fruit costs compared to 2.1 percent in June.

Porter suggested that while Canada’s tariff dispute with the U.S. may be influencing food inflation, the primary factors are climate-related issues affecting coffee, chocolate, and beef prices. He noted that tariffs are also contributing to persistent inflation in durable goods, particularly in the automotive sector. "The trade war has had an effect on auto prices and autos are a big share of the CPI," he said.

Shelter inflation saw a slight increase to three percent in July, up from 2.9 percent in June, marking the first rise in this category since February 2024. Rent prices increased notably in regions such as Prince Edward Island, Newfoundland and Labrador, and British Columbia. Although lower mortgage costs are helping to moderate overall shelter inflation, natural gas prices fell less than in June, primarily due to rising costs in Ontario.

Porter expressed frustration over the persistent shelter inflation but noted that market data indicates rent is decreasing in major Canadian cities. He anticipates further easing in this component of the consumer price index throughout the year.