Canada’s inflation rate rose to 3 per cent in July, driven primarily by a sharp increase in gasoline prices, according to data released by Statistics Canada. This marked a rise from the 2.8 per cent inflation rate recorded in June and slightly exceeded economists’ expectations.

Gasoline prices rose 25.7 per cent year-over-year in July, up from a 20.5 per cent annual increase in June. The escalation has been linked to ongoing geopolitical tensions in the Middle East, notably the deterioration of a ceasefire agreement between the United States and Iran. This conflict has disrupted oil flows through crucial maritime routes, including the Strait of Hormuz, and triggered partial closures of shipping lanes in the Red Sea during late July, contributing to volatile global energy prices.

While overall inflation accelerated, food price inflation eased to 3.1 per cent in July from 3.9 per cent in June, marking the slowest growth since June 2025. The moderation in food costs mainly reflected slower price increases for fresh vegetables and chicken, as well as declines in prices for cereal products. Fresh fruit prices, however, rose during the period. Year-over-year, notable food price increases included bananas (13 per cent), lettuce (18.8 per cent), carrots (15.6 per cent), and beef (12.4 per cent). Conversely, prices declined for shrimp and prawns, eggs, cereal products, oranges, grapes, dried fruit, prepared soup, and some oils. Despite this slowdown, grocery prices have now risen faster than overall inflation for 18 consecutive months.

Randall Bartlett, deputy chief economist at Desjardins Group, highlighted that several factors have contributed to elevated food costs, including Canada’s reliance on food imports even during summer months, higher transportation expenses, and increased production costs such as fertilizer prices, which have risen since the outbreak of the conflict involving Iran. Bartlett noted that food inflation remains above target and may not return to a two per cent growth rate until well into 2027.

Higher gasoline prices have also pushed airfares up by 12 per cent year-over-year in July, partly as airlines passed on higher jet fuel costs to consumers. This marked the third straight month of increases in airfare. Additionally, travel tour prices increased by 15.2 per cent over the previous year, reflecting higher costs for hotels and flights to the United States during the FIFA World Cup.

Core inflation measures, which exclude volatile components such as food and gasoline, remained relatively stable but edged slightly higher in July. The CPI-median and CPI-trim measures stood at around two per cent and 1.9 per cent, respectively. Economists view this as consistent with the Bank of Canada’s target range but caution that short-term inflation momentum shows some signs of firming.

Looking ahead, economists are focusing on potential impacts from newly announced U.S. tariffs, scheduled to come into effect on August 19. Bartlett emphasized that the risk posed by these 50 per cent tariffs on Canadian imports could have more significant implications for inflation and economic forecasts than the July data, which were influenced by temporary factors including the World Cup. He also noted that sustained declines in energy prices depend on restoring stable oil flows through the Strait of Hormuz.

Overall, analysts suggest that the Bank of Canada may hold its key interest rate steady at 2.25 per cent for the remainder of the year, monitoring unfolding trade developments and geopolitical risks closely as they assess the inflation outlook.