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“Sharply higher energy prices saw Canadian inflation unexpectedly spike in July. But so far, the impact of tariffs has been fairly modest and this is a key reason why we expect further rate hikes from the Bank of Canada,” note ING analysts.

Key quotes

“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

“Then there’s the issue of tariffs – arguably the Bank of Canada’s biggest headache at the moment.  In response to the US steel and aluminium tariffs, Canada retaliated with its own list of duties in early July – not only on metals but also 10% taxes on over 80 consumer products – including coffee, whiskey and bedding. This latest inflation report was the first to include the impact of these fresh tariffs.”

“In theory, these should immediately lift consumer prices, depending on the extent to which businesses absorb the extra costs. So far though, the impact appears to have been minimal.”