On the Radar: Cooled in both Canada and the U.S. but Oil surged back above $92. Why are rate cuts still off the table?

Economic insights
Jul 23, 2026

First National Financial LP

Quick Takes:

Canadian CPI cooled to 2.8% in June from 3.2% in May, beating the 2.9% consensus, with gasoline decelerating to 20.5% year over year and both core measures easing below the Bank of Canada’s 2% target.
U.S. CPI fell to 3.5% from 4.2%, below forecast, as the energy index posted its largest one-month decline since April 2020.
Brent crude passed $92 per barrel on Wednesday, a six-week high and more than 20% above the $70-$75 range the Bank of Canada’s new forecast assumes, after tanker attacks in the Strait of Hormuz and more than a week of nightly U.S. strikes on Iran.
The Bank of Canada held at 2.25% on July 15, markets price no cut in Canada this year, and U.S. hike odds for July 29 collapsed to 8% after the soft CPI before rebounding as oil surged past $90.

Canadians finally got the inflation news they had been waiting for. On Monday, July 20, Statistics Canada reported that headline CPI cooled to 2.8% in June from 3.2% in May, and the U.S. reading released the previous Tuesday fell even harder, to 3.5% from 4.2%. Both reports would normally start the countdown to rate cuts.

Nobody is counting down, however, because the oil market spent the week telling a different story. The U.S.- Iran ceasefire that produced June’s relief collapsed on July 8, and by Wednesday of this week Brent crude had passed $92 per barrel, a six-week high. In other words, the inflation data described a month that no longer exists.

Inflation cooled in both countries

Canada’s June report was better than expected on nearly every line. Headline CPI came in at 2.8% against a consensus of 2.9%, while prices fell 0.4% on the month and the seasonally adjusted index posted its first decline since April 2025.

Gasoline did most of the work. Pump prices fell 10.2% in June alone, cutting the year-over-year increase to 20.5% from the 33.2% recorded in May. Because energy has been the whole inflation story since the Strait of Hormuz closed in February, that deceleration flowed straight into the headline number.

Core measures eased as well, with CPI-trim at 1.8% and CPI-median at 1.9%, both below target. Grocery prices still rose 3.9% and have now outpaced headline inflation for 17 straight months. Even the June oddity was homegrown, since traveller accommodation jumped 10.1% when World Cup matches filled hotels in Toronto and Vancouver.

The U.S. numbers were even more striking. Headline CPI fell to 3.5% from 4.2%, below the 3.7% forecast, while core CPI eased to 2.6% and was flat on the month. Energy dropped 5.7% in June, the largest one-month decline since April 2020.

The relief was over before the data arrived

Timing is everything with inflation data. June’s readings captured the one month when the ceasefire held, tanker traffic through Hormuz was rebuilding, and oil prices were sliding toward pre-war levels. That window closed before Statistics Canada could even publish the numbers.

The collapse came in stages. Iran attacked three commercial ships in early July, the United States responded with strikes on July 8, and President Trump declared the ceasefire over the same day. Washington then revoked the waiver that had allowed Iran to keep selling crude, effective July 17.

Oil markets have repriced the war ever since. Three more tankers were struck on Monday, Houthi fighters declared a blockade of Saudi ports, and Brent passed $92 per barrel on Wednesday, a six-week high. That leaves crude up more than 25% since the ceasefire began falling apart in early July.

The next inflation reports will tell this darker story. July’s Canadian CPI, due in mid-August, will capture pump prices rising instead of falling, and the U.S. report will do the same. In other words, the 2.8% print is not the start of a trend but the end of one.

The central banks already told us their answer

None of this caught the Bank of Canada off guard. Governing Council held the overnight rate at 2.25% on July 15, its sixth consecutive hold, even though May inflation had climbed to 3.2%. Governor Macklem’s message was blunt: “we will not let higher oil prices become persistent inflation.”

Its July Monetary Policy Report shows why cuts are off the table. Inflation only returns to the 2% target in early 2027 under the Bank’s own projection because that forecast assumes oil stabilizes between $70 and $75 per barrel. Brent now sits more than 20% above the top of that range, one week after the report was published.

South of the border, the whipsaw proved the point. Odds that the Federal Reserve lifts its 3.50%-3.75% range on July 29 collapsed from 25% to 8% after the soft June CPI, then climbed again as oil surged past $90. When one oil rally can revive hike bets that a good inflation report had buried, cuts are nowhere in sight.

Canadian rate pricing has the same shape. Markets see no chance of a cut this year, while swaps price 50 basis points of tightening over the next twelve months and less than even odds of a hike by December. September 2 has become a meeting to watch for hawkish language, not for relief.

What this means for Canadian mortgage rates

Variable-rate borrowers should stop watching the inflation data and start watching the oil price. The overnight rate flows through prime to every variable mortgage in the country, and markets have removed cuts from the table for 2026 entirely. If Brent stays above $90, the conversation at the September 2 meeting will be about whether to hike, not when to cut.

Fixed rates are pinned from both sides. Canadian lenders price fixed mortgages off GoC bond yields, which take their floor from U.S. Treasuries, so a one-in-three chance of a Fed hike keeps that floor firmly in place. Domestic pressure is building too, since a hawkish Bank of Canada keeps shorter-term GoC yields elevated.

Renewers face uncomfortable arithmetic. Waiting for relief made sense when a cutting cycle looked imminent, but the market is now pricing the opposite direction into 2027.

What could change the picture

Peace remains the single biggest variable. Mediators from Qatar, Egypt, Pakistan, and Oman spent the week pushing a 10-day ceasefire that would reopen both Hormuz shipping lanes, and a durable version would pull Brent back toward the Bank’s $70-$75 assumption. Trump has so far dismissed the talks as a waste of time, however, so that path looks narrow.

The Fed’s July 29 decision is the nearest test. A hold with cautious language would ease pressure on Treasury yields and give GoC yields room to drift lower. But a hike would do the opposite and raise the odds that the Bank of Canada follows by year-end.

Watch the core numbers too. Both CPI-trim and CPI-median sit below 2%, which gives Macklem a reason to stay patient rather than hike at the first oil-driven CPI spike. If core holds while headline climbs, the Bank can treat the energy shock as temporary and simply stay on hold longer.

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