Canada experienced a rise in inflation to three percent in July, driven by escalating tensions in the Middle East leading to an increase in gas prices. Statistics Canada data revealed a faster growth rate in gas prices, reaching 25.7 percent annually in July, compared to the 20.5 percent seen in June. The blockade in the Strait of Hormuz and disruptions in Red Sea shipping routes were cited as the primary factors pressuring energy prices.

Economists were slightly surprised by the three percent inflation figure, as most had predicted a slight increase to 2.9 percent. July also saw a surge in travel tour costs, attributed to higher hotel rates and increased flights to U.S. destinations during the FIFA World Cup.

Moreover, rising jet fuel expenses pushed air transportation prices up by 12 percent year-over-year in July, compared to 9.6 percent in June. However, some of these upward price pressures are expected to be short-lived, with gas prices showing a slight decrease in August following the conclusion of the World Cup.

While food prices helped offset inflation elsewhere, inflation for food purchased from stores decreased to 3.1 percent in July from 3.9 percent in the previous month. Slower growth in fresh vegetables, chicken, and cereals contributed to this decline, while fresh fruit inflation accelerated to 6.1 percent due to soaring costs for berries and melons.

Despite positive food price trends, grocery price inflation has surpassed the all-items consumer price index for 18 consecutive months, according to Statistics Canada. Core inflation measures that exclude volatile components like gas and food also showed a slight uptick in July, with the consumer price index rising 2.2 percent for the third consecutive month.

BMO senior economist Robert Kavcic mentioned that core inflation measures, including CPI-trim and CPI-median, were slightly higher than expected but still within the Bank of Canada’s target range. Kavcic noted that despite the uptick in core inflation, the overall inflation outlook remains stable and manageable.

The July inflation data will influence the Bank of Canada’s upcoming interest rate decision on September 2. Analysts predict that the central bank will maintain its benchmark interest rate at 2.25 percent, considering the subdued core inflation measures and overall inflation stability. Both BMO and CIBC expect the Bank of Canada to keep interest rates unchanged for the remainder of the year.