Higher gasoline prices pushed Canada’s inflation rate up to three per cent in July, but economists said they’ll be watching whether new 50 per cent U.S. tariffs go into effect this week to determine which way the Consumer Price Index will move next.

Gas prices rose by 25.7 per cent year-over-year for the month, up from a 20.5 per cent gain in June, according to monthly data from Statistics Canada released on Monday.

Officials attributed the gas price spike to the ongoing conflict in the Middle East and the blockade of the Strait of Hormuz , along with the partial closure of Red Sea shipping routes in late July.

While inflation was higher than the 2.8 per cent level recorded in June, food inflation slowed to 3.1 per cent following a 3.9 per cent increase the month prior, the slowest pace of growth since June 2025.

Slower price growth for fresh vegetables and chicken, as well as lower prices for cereal products drove the slowdown, which was offset by higher prices for fresh fruit.

Food items that increased the most in price on a yearly basis included bananas (13 per cent), lettuce (18.8 per cent), carrots (15.6 per cent) and beef (12.4 per cent). Items that decreased in price included shrimp and prawns, eggs, cereal products, oranges, grapes, dried fruit, prepared soup and some oils.

However, July still marked the 18th consecutive month in which grocery price inflation outpaced overall inflation.

Randall Bartlett, deputy chief economist with Desjardins Group, noted several factors are affecting grocery prices. Canada imports a lot of food even in the summer months, and higher transportation costs are feeding into grocery prices, he said. Fertilizer costs and other production costs have also risen since the Iran war began.

“We are seeing food inflation moving in the right direction, but it does remain elevated,” Bartlett said.
“We may not see food inflation return to the two per cent pace until well into 2027, so it is a very challenging environment and one that we’re continuing to look at and track very closely.”

Higher gas prices also put upward pressure on air fares, which rose by 12 per cent year-over-year in July as airlines continued to pass on higher jet fuel prices to customers. It marked the third consecutive month of higher air fares. Travel tour prices also rose by 15.2 per cent year-over-year in July because of more expensive hotels and flights to the U.S. during the FIFA World Cup.

“Energy was part of the story, and I think that was widely expected, but there are one-off factors like the World Cup that (are) probably going to be reversed in August,” said Bartlett. “We’re looking at a three-month average through August that could be just below three per cent. That’s still elevated, but still within the Bank of Canada’s one to three per cent operating band.”

Core inflation measures, which exclude volatile components such as food and gasoline, rose slightly in July but remained relatively stable. CPI-median and CPI-trim hovered at two per cent and 1.9 per cent, respectively.

“Core inflation landed on the warmer side of expectations in July. The trim and median both rose a tick from the prior month and were a tick stronger than expected,” wrote Robert Kavcic, senior economist at BMO Economics, in a note on Monday morning.

“It’s notable that the breadth of overall inflation is centred right around two per cent, but the breadth of core components did shift more toward the high side in July. Taken altogether, we can’t ignore some of the firmer short-term core inflation momentum, but the big picture is that we’re still bouncing around two per cent on a six- and 12-month basis.”

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Bartlett expects the Bank of Canada to hold its key interest rate at 2.25 per cent for the rest of the year. However, that all depends on whether U.S. President Donald Trump’s new 50 per cent tariffs come into effect on Aug. 19. The ongoing Iran war also means there’s a risk that gasoline prices remain elevated for some time.

“Policymakers are going to look through the July inflation print and really focus much more on the risks around the current trade environment with the United States and how the threat of tariffs shakes out in the middle part of this week,” Bartlett said.

“Right now, the threat of 50 per cent tariffs is a much more material risk to the inflation and economic forecasts than a backward-looking print for July that’s muddied by one-off factors like the World Cup.”

• Email: ptran@postmedia.com