Canada’s inflation rate increased to 3% in July, driven mainly by higher gasoline prices, while economists are closely watching whether new 50% U.S. tariffs will take effect this week and influence the future direction of the Consumer Price Index (CPI).
Gasoline prices drive inflation higher
According to Statistics Canada data, gasoline prices increased 25.7% year over year in July, compared with a 20.5% rise in June. Officials linked the increase to the ongoing conflict in the Middle East, disruptions around the Strait of Hormuz and partial closures of Red Sea shipping routes.
The increase pushed overall inflation above June’s 2.8% reading, although some categories showed signs of moderation. Food inflation slowed to 3.1% in July, down from 3.9% the previous month, marking the slowest pace of growth since June 2025.
Food inflation remains above overall inflation
The slowdown in grocery price growth was mainly driven by lower prices for fresh vegetables, chicken and cereal products, although higher fresh fruit prices offset some of the decline.
Several grocery items continued to experience significant yearly increases, including bananas, lettuce, carrots and beef. Despite the moderation, July marked the 18th consecutive month in which grocery inflation remained higher than overall inflation.
Randall Bartlett, deputy chief economist at Desjardins Group, said transportation costs, fertilizer prices and higher production expenses continue to influence food prices.
“We are seeing food inflation moving in the right direction, but it does remain elevated,” Bartlett said, adding that grocery inflation may not return to the 2% range until well into 2027.
Higher energy costs impact travel prices
Rising fuel costs also affected transportation-related categories. Airline fares increased 12% year over year in July as carriers passed higher jet fuel costs on to passengers. It was the third consecutive month of higher airfares.
Travel tour prices also climbed 15.2% compared with the previous year, partly due to higher hotel and flight costs linked to travel demand around the FIFA World Cup.
Economists expect some of these temporary factors, including World Cup-related travel costs, to reverse in August. Bartlett said inflation could average slightly below 3% over the three months through August, remaining within the Bank of Canada’s 1% to 3% target range.
Core inflation remains relatively stable
Underlying inflation measures remained more stable in July. CPI-median inflation was around 2%, while CPI-trim inflation stood at 1.9%, indicating that broader price pressures were still relatively contained.
Robert Kavcic, senior economist at BMO Economics, said core inflation was slightly stronger than expected, with some categories showing increased momentum. However, he noted that inflation remains close to the Bank of Canada’s target over both six-month and twelve-month periods.
Tariffs could shape the Bank of Canada’s next moves
Economists believe the future path of inflation will depend heavily on trade developments with the United States. Randall Bartlett expects the Bank of Canada to keep its key interest rate at 2.25% through the remainder of the year, although the outlook depends on whether the proposed U.S. tariffs come into effect.
According to Bartlett, policymakers are likely to focus less on July’s inflation data and more on the potential impact of tariffs and ongoing geopolitical risks, including the possibility of continued pressure on gasoline prices.
