Consumer prices bounced up in July after decelerating almost every month since peaking in June last year, possibly signalling that the Bank of Canada could be entering one of the most difficult phases of its inflation fight.

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Canadians paid 3.3 per cent more for goods and services in July than a year ago, Statistics Canada said on Aug. 15. Economists were expecting a three per cent increase after the consumer price index (CPI) fell into the central bank’s target of one to three per cent in June with a reading of 2.8 per cent, the first time it’s been in range since March 2021.

On a monthly basis, inflation rose 0.6 per cent in July compared to 0.1 per cent gain in June.

The CPI had gradually been pulling back from a four-decade peak of 8.1 per cent in June 2022 as base-year effects, such as high gasoline prices, no longer factored into the calculation. That prompted the Bank of Canada to pause its rate-hiking regime in January.

But better-than-expected growth and a resilient labour market have kept the economy churning, so the Bank of Canada increased interest rates in both June and July to continue its inflation-fighting stance. The policy rate is now five per cent, the highest it’s been since 2001.

“There’s no sense sugar coating this one — it is not a good report for the Bank of Canada,” Douglas Porter, Bank of Montreal’s chief economist,  said in a note to clients. “While the bank had anticipated a back-up in headline inflation in their latest forecast, July’s result is already at their call for all of Q3 (3.3 per cent), and the August reading is almost certainly set to be even higher.”

In July, a record increase of 30.6 per cent in mortgage interest costs and elevated grocery prices contributed to the overall growth in inflation, which was only partially offset by a decline in energy prices from a year ago. Excluding gasoline, the CPI rose 4.1 per cent, slightly higher than the four per cent recorded in June.

The Bank of Canada’s preferred core measures of inflation, which exclude volatile items from the CPI, were hardly changed. The CPI median was 3.7 per cent, the same as in June, but CPI trim fell 0.1 percentage points to 3.6 per cent.

Leslie Preston, a senior economist at Toronto-Dominion Bank, said core inflation measures are improving at a “glacial” pace.

“Underlying inflation remains a long way from the two-per-cent goal,” she said in a note to clients, adding that she expects residual consumer demand to “hum along” and progress on inflation to remain “disappointing” for the remainder of the year.

Grocery prices are still high, but increased at a slower pace of 8.5 per cent, after a 9.1 per cent increase in June, primarily due to lower prices for grapes and oranges.

Energy prices fell 8.2 per cent in July while gasoline prices fell nearly 13 per cent. Energy prices fell 8.2 per cent last year as the Russian invasion of Ukraine entered the summer months. Gas prices are still comparatively high, but they’ve fallen from their peak last summer.

“Easing in BoC’s ‘core’ CPI measures in July is welcome after months of sticky prints at higher levels, but is far from enough to signal that this period of above-normal inflation is at an end,” Royal Bank of Canada economist Claire Fan said in a note.

Fan expects policymakers to hold the interest rate at five per cent at their meeting in September, but said the central bank is willing to hike if inflation remains sticky.

Although the 3.3-per-cent CPI print in July might worry the Bank of Canada, recent data that shows the labour market and consumer spending are cooling could be enough to keep policymakers from hiking again when they meet in September.

The unemployment rate rose to 5.5 per cent in July from a pandemic-era low of 4.9 per cent while softer consumer spending in the second quarter forced Canadian Tire Corp. Ltd., one of the country’s largest retailers, to withdraw its growth target.

The Bank of Canada said it expects inflation to return to its two-per-cent target by 2025, giving it a “long time” to bring prices back into balance,” Tiago Figueiredo, a Desjardins economist, said in a note.

“As time passes more mortgages will renew at higher rates and any excess savings will be exhausted which should weaken demand going into the latter half of the year,” he said. “Barring any major surprise in the upcoming activity data, we expect the Bank of Canada to stay sidelined on Sept. 6.”

• Email: bbharti@postmedia.com