Canada's Economy Faces Double Whammy: Inflation Data and US Tariffs
The Canadian economy is facing two key challenges in the coming days: inflation data and new US tariffs. The Bank of Canada's Consumer Price Index (CPI) for July is expected to show a slight increase, with year-over-year price growth rising to 2.9% from 2.8% in June.
The driving force behind this increase is a reacceleration in energy prices, particularly oil and gasoline. While oil prices are still lower than their April and May peaks, they have bounced higher due to ongoing conflict in the Middle East disrupting transportation through the Strait of Hormuz. As a result, gasoline prices were on average 25% above a year ago in July.
However, pass-through from higher energy prices to broader consumer prices has remained limited. Growth in airfares remains high, but core measures' prices have stayed near the 2% target. In July, we expect prices excluding food and energy products to tick up to 1.9% from 1.8% in June.
The more significant challenge for Canada is the looming US Section 338 tariffs targeting about 5% of its exports, set to take effect on August 19. This has fast-tracked trade talks between Canada and the US, but the odds of a full resolution before Wednesday remain low.