| Quick Facts |
| US and Canadian Inflation Rates Show Expected Surge: July 2025 |
| What’s driving inflation? |
| Impact on interest rates and monetary policy |
| Investment implications |
Quick Facts
The highly anticipated June inflation reports for both the United States and Canada have finally arrived, and the markets were not surprised to see the numbers reflect a rebound in prices.
US and Canadian Inflation Rates Show Expected Surge: July 2025
The Consumer Price Index (CPI) and core CPI in both countries have indeed climbed higher, reinforcing the notion that inflation remains a persistent concern for central bankers and policymakers.
In the US, the personal consumption expenditures (PCE) price index, a key gauge of inflation, rose 0.6% in June, following a 0.4% increase in May. The core PCE price index, which excludes volatile food and energy prices, climbed 0.5%, marking the largest gain since August 2021. The six-month average of core PCE inflation accelerated to 4.4%, the highest since September 2021, indicating a persistent upward trend.
What’s driving inflation?
Several factors are contributing to the rise:
- Supply chain disruptions: The ongoing pandemic has led to ongoing supply chain issues, particularly in the manufacturing sector, which continues to reel from shortages and delays. This has resulted in higher production costs, which are being passed on to consumers in the form of higher prices.
- Rising wages: As the labor market remains tight, businesses are forced to increase wages to attract and retain talent, leading to higher production costs and, subsequently, higher prices.
- Commodity prices: The war in Ukraine has led to increased uncertainty and prices for commodities such as oil, wheat, and soybeans, which are essential inputs for many manufactured goods and food products.
Meanwhile, in Canada, the Bank of Canada’s gauge of inflation, the CPI, also showed a significant increase, rising 0.7% in June, following a 0.4% gain in May. The core CPI, which excludes volatile items like gasoline and fresh vegetables, climbed 0.5%, the largest gain since February 2020.
Impact on interest rates and monetary policy
The inflation acceleration in both countries will likely have a significant impact on monetary policy decisions moving forward. The US Federal Reserve and the Bank of Canada are already grappling with the prospect of higher interest rates, which could have far-reaching consequences for borrowing and spending patterns.
In the US, the Fed has already hinted at a potential rate hike in July, with some analysts expecting as many as three rate hikes this year. The increased inflationary pressures also raise concerns about the housing market, as higher interest rates could slow the pace of home purchases and construction.
In Canada, the Bank of Canada has been unwinding its emergency stimulus measures since the pandemic began, and higher inflation could prompt a more aggressive tightening of monetary policy. The Canadian dollar has historically been sensitive to interest rate decisions, so a faster-than-expected removal of stimulus could lead to significant currency movements.
Investment implications
The inflation acceleration has significant implications for investors, particularly those with exposure to fixed-income securities or dollar-denominated assets:
- Bonds: Higher inflation can erode the purchasing power of fixed-income investments, making them less attractive. Investors may need to re-evaluate their bond portfolios to ensure they are hedged against inflation.
- Currencies: The strengthening of the Canadian dollar and the US dollar, respectively, could have significant implications for investors with exposure to international equities or fixed-income securities.
- Stocks: Companies with strong pricing power, such as those in the technology and healthcare sectors, may benefit from the inflationary environment.
