(Bloomberg) -- Inflation in Canada was firmer than expected last month, keeping underlying price pressure right at the central bank’s target and giving policy makers one less reason to consider immediate interest rate cuts.

Annual consumer price inflation was 2% in July, matching June’s pace, Statistics Canada said Wednesday from Ottawa. Economists had expected inflation to slow to 1.7%. Core inflation, a better gauge of underlying pressure, unexpectedly ticked up slightly to 2.03%.

Key Insights

  • While sharp movements in gasoline prices have generated volatility in Canada’s headline inflation number, underlying price pressure has been remarkably stable near the Bank of Canada’s 2% target for well over a year. This suggests a largely benign environment for inflation.
  • Stronger inflation dynamics in Canada are one reason why economists and markets are anticipating fewer cuts, and a slower pace of reductions, by the Bank of Canada than the Federal Reserve. Markets are pricing in just one rate cut this year in Canada, even though some analysts have begun to speculate a cut could take place as early as the next rate decision in September due to growing global trade tensions.
  • The expectation had been price gains would ease over the summer months, with the Bank of Canada projecting annual inflation to temporarily fall to 1.6% in the third quarter before returning to 2%. Wednesday’s numbers suggest inflation dynamics have been stronger than policy makers had predicted.

Canada’s currency rose after the release, climbing 0.3% to C$1.3278 against its U.S. counterpart at 8:41 a.m. in Toronto. Two-year bond yields jumped 4 basis points to 1.39%.

“It’s an argument against a September rate cut, but they’ll still have to respond with stimulus if the global economy slows significantly,” Andrew Kelvin, senior Canada rates strategist at Toronto Dominion Bank.

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  • On a monthly basis, consumer prices rose 0.5%, well above analyst projections for a 0.2% gain.
  • On a seasonally adjusted basis, prices rose 0.4%, after a 0.1% drop in June. Since February, monthly seasonally adjusted price inflation has averaged almost 0.3%, double the monthly averages recorded in recent years.
  • The average of three measures of core inflation tracked by the Bank of Canada rose slightly to 2.03% in July, from a downwardly revised 2.0% in June. The common rate was at 1.9%, the median rate was 2.1% and the trim rate was 2.1%.
  • Air transportation and travel tours was the biggest upward contributors to monthly CPI, along with gasoline and digital computing equipment and devices.

--With assistance from Erik Hertzberg.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier

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