Canada’s inflation rate decelerated to 1.7 per cent in July, from 1.9 per cent the month before, driven by a drop in

gasoline prices that reflects the removal of the consumer carbon tax, Statistics Canada said on Tuesday.

Gasoline prices were down 16.1 per cent year over year and down 0.7 per cent on a monthly basis after a ceasefire between Iran and Israel and increased supply from the Organization of Petroleum Exporting Countries and its allies.

Despite the headline number, seven major components in the consumer price index basket rose in July, Statistics Canada said.

Excluding gasoline, CPI rose 2.5 per cent in July, matching increases in June and May. Excluding indirect taxes, inflation accelerated 2.3 per cent last month, down from 2.5 per cent in June.

But core inflation, which the Bank of Canada prefers to look at when making its monetary policy decisions, stayed elevated around three per cent.

Year-over-year CPI-common rose 2.6 per cent last month, the same as in June, and CPI-median rose by 3.1 per cent, up from three per cent in the previous month. CPI-trim rose by three per cent, the same increase as the month before.

Andrew Hencic, a senior economist at Toronto-Dominion Bank, said core inflation is showing signs of losing momentum.

“On a go-forward basis, this report builds on what we saw last month, slowing momentum in core prices as slack in the economy builds,” he said in a note. “From our lens, we think the Bank of Canada will have room to deliver more easing later this year as the economic slack continues to build and offset inflation pressure.”

Despite concerns about trade war disruptions and the impact on pricing, Statistics Canada did not mention any price impacts due to tariffs. Last month, the agency said the uncertainty in global trade had put upward pressure on clothing prices.

The Bank of Canada has said it will continue to monitor how tariff impacts are being passed through to consumers. The central bank has held its policy rate during its last three decisions at 2.75 per cent, citing concerns over underlying inflation as one of the reasons.

Bank of Montreal chief economist Douglas Porter said the three-month trend in median CPI and CPI-trim has calmed to a “reasonable 2.4 per cent annualized,” which could set the stage for further rate relief.

“If that more recent pace in core is maintained, and the economy remains soft, we believe that will eventually set the stage for Bank of Canada cuts,” he said in a note.

Still, there remain a number of economic data releases before the Bank of Canada’s next rate decision on Sept. 17, including second-quarter gross domestic product and job numbers for the month of August.

Shelter prices in July rose 2.9 per cent, which was driven by an increase in rent, which rose 5.1 per cent last month, up from 4.7 per cent in June. Mortgage interest costs increased by 4.8 per cent year over year last month, down from 5.6 per cent in June. Mortgage interest costs have been on a downward trend since September 2023.

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The increase in shelter inflation was also attributed to a smaller year-over-year decline in natural gas prices, with residents in Ontario paying more compared to the previous year.

Grocery prices also accelerated last month, rising by 3.4 per cent, compared to 2.8 per cent in June. The main price hikes were in confectionery and coffee due to unfavourable growing conditions for these products.

Price growth in grocery prices has outpaced headline inflation for the past six months. Statistics Canada said Canadians paid 27.1 per cent more for food in July than they did in July 2020.