Canadian inflation edges up as trade war with U.S. heats up

Investing.com -- Canada’s annual inflation rate edged up to 1.9% in June, from 1.7% in May, driven by firmer prices in durable goods and a slower pace of decline in gasoline costs. The latest Consumer Price Index (CPI) data released by Statistics Canada suggest that underlying inflationary pressures remain intact despite geopolitical tensions and evolving trade dynamics.

A key contributor to the acceleration was a moderation in energy disinflation, as gasoline prices fell 13.4% from a year earlier, compared with a steeper 15.5% drop in May. The year-over-year comparison was driven by a larger monthly decrease in June 2024, a base effect that distorted the annual reading.

Excluding energy prices, the CPI rose 2.7% annually in June, underscoring the broad-based nature of inflation. The removal of carbon pricing in April played a role in the divergence between headline inflation and the core metric.

The run-up in durable goods prices persisted, with passenger vehicle costs climbing 4.1% from a year earlier, up from a 3.2% increase in May. Used vehicle prices reversed a prolonged trend, posting their first rise in 18 months amid tighter inventories.

Amid the ongoing trade war between Canada and the United States, consumers are beginning to feel cost pressures in affected sectors. As of July 15, Canada imposed 25% tariffs on $30 billion worth of U.S. goods, retaliating against U.S. tariffs of 25% on Canadian exports and 10% on energy introduced in March.

The escalation has already weighed on Canadian trade, triggering a record deficit and reshaping the once-integrated relationship under the Canada-United States-Mexico Agreement. Canada introduced a temporary remission process until October 15 to blunt the impact of the tariffs on domestic businesses and consumers.

Clothing and footwear prices accelerated sharply, up 2.0% in June compared with 0.5% in May, partly due to rising import costs. Meanwhile, food inflation moderated slightly, with fresh vegetable prices declining for the first time since 2021.

While no special adjustments to the CPI are required to account for tariffs, Statistics Canada has noted that final consumer prices reflect these levies. As trade uncertainty persists, elevated goods prices could continue to put upward pressure on future inflation readings.

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