Inflation should be propped up for a little while longer

Canada's July CPI release has caught markets quite off-guard. At 3% year-on-year, the latest data is significantly higher than the 2.5% figure investors were looking for.

Admittedly, energy costs drove the majority of gains, following a 25.4% YoY rise in gasoline prices. But given that oil prices have stabilised, we suspect this represents something of a peak. In principle, this should see inflation ease off over coming months, but there are a few reasons to expect headline CPI to remain elevated for a little while longer.

Firstly, while July’s wage growth was somewhat 'softer' (3% YoY, down from 3.9% a few months before), recent increases in Canada’s minimum wage should start to translate into higher consumer prices. This, along with a modest depreciation in the Canadian dollar over recent months, should help to keep inflation aloft throughout the rest of the year.