Key Takeaways
- Canada’s annual inflation rate rose 2.4% in December, from 2.2% in November.
- The federal tax holiday prices were the key driver of December’s headline inflation.
- Core measures decelerated for a third consecutive month.
Canada’s Consumer Price Index rose 2.4% in December, after rising 2.2% the month before, surpassing the FactSet consensus estimate of 2.2%. The latest consumer price data gives further weight to analysts’ expectations that the Bank of Canada is likely to leave interest rates unchanged for the whole of 2026.
According to the latest Statistics Canada report, consumer prices fell 0.20% on a monthly basis, less than the 0.40% fall in the FactSet estimate.
The primary driver of the inflation increase was the federal tax holiday between Dec. 14, 2024 and Feb. 15, 2025, which was offset by declining gasoline prices, which fell 13.8% in December after declining 7.8% in November.
“Various indexes were affected by the GST/HST exemption in December 2024, including restaurant food, alcoholic beverages, toys, games and hobby supplies, children’s clothing and some grocery items, such as potato chips and confectionery,” Statistics Canada said.
However, the Bank of Canada’s preferred core measures of inflation – CPI-trim and CPI-median - which strip out more volatile segments like food and energy, eased for the third consecutive month.
December CPI-trim declined to 2.7% from 2.9% while CPI-median fell to 2.5% from 2.8% in November. Analysts say the CPI data will allow the Bank of Canada to remain on the sidelines for longer. At its last meeting in December, policymakers had decided to hold the policy rate steady at 2.25%, saying the interest rate was at about the right level.
The central bank policymakers are due to meet for the first time this year on Jan. 28, although markets are expecting a hold for the rest of the year with economists from BMO and the CIBC saying the inflation trend gives the central bank no reason to move the interest rate any time in the foreseeable future.
Increasingly, the upcoming joint review of the Canada-United States-Mexico Agreement (CUSMA) is emerging as an event that could be pivotal to the Bank of Canada’s monetary policy path this year.
Following the report, the Canadian dollar edged slightly higher by 0.31% to C$1.38, or 0.72 US cents, while the S&P/TSX Composite Index shrugged off the report to remain at 33,003 points. The two-year government bond yield remained little changed at 2.53%.
December CPI Report Key Stats
- Month over month CPI fell 0.20% in December after rising 0.10% in November.
- On an annualized basis, CPI rose to 2.4%, compared to 2.2% in November.
- The CPI-trim cooled to 2.7% from 2.9% while CPI-median inflation also slowed, to 2.5% from a 2.8% annual clip recorded in November.
The following are excerpts from analyst notes on the December CPI report.
Not Enough in the Data to Move the Central Bank Off the Sidelines
“Given the big weight of some special factors in this messy month, we believe the mild core news in this report counter some of the bad news. While the headline rate was above expected, the details were somewhat softer, and the Bank will likely be encouraged by the pullback in most core CPI measures. However, there certainly is not enough here to push the Bank of Canada toward more cuts. It would take a serious deterioration in the economy and some further signs of core inflation decelerating to again open the door for renewed policy easing—we’re simply not there yet.”
- Douglas Porter, chief economist at BMO Economics
Decline in Core Measures Proves Rate Hike Expectations Are Overblown
“The second-consecutive below-target monthly gain in CPI-trim and CPI-median should further reduce speculation that the Bank of Canada will need to hike interest rates this year. If anything, coupled with the data last week suggesting that the economy contracted in the fourth quarter, the recent data raise the risk that the Bank will opt to loosen policy a bit further.
“Somewhat unusually, the CPI excluding food and energy nonetheless rose by a stronger 0.3%, which appears to be because the large fall in gasoline within the transportation sector was offset by strong rises in the volatile travel services and airfare components. The subdued moves elsewhere were reflected in the CPI-trim and CPI-median core measures…. That makes us even more confident in our view that the average annual rate will decline from the current 2.6% to 2% by the summer, rather than remaining above 2% well into 2027 as the Bank currently forecasts.”
- Stephen Brown, deputy chief North America economist a Capital Economics
The Interest Rate Will Remain on Hold for Long
“Canadian inflation was a little stronger than expected in December, albeit not by enough to concern the Bank of Canada. The acceleration in the year-over-year rate was largely due to base effects from a year ago when the temporary GST/HST tax break lowered prices of some goods and services. That impact was offset slightly by gasoline prices falling more in year-over-year terms than they did in the prior month. Core measures of inflation were mixed, with ex-food/energy rising by an above-trend 0.3% seasonally adjusted, but CPI-trim and CPI-Median only seeing marginal monthly increases. An average of four core measures (including CPI-X alongside the aforementioned three) was 0.14% m/m, 2.1% 3m-annualized and 2.65% y/y, which represented slight decelerations versus the prior month. “Because of that, and despite a somewhat stronger than expected headline reading, today’s data are still consistent with underlying inflation being close to 2%, and as a result we continue to see no change in the Bank of Canada overnight rate throughout 2026.”
- Andrew Grantham, senior economist at CIBC Capital Markets
Bond Yield Softness Reflected Slowdown in Inflation
“…the slowing in the Bank of Canada’s preferred core measures, which exclude changes in indirect taxes, provide even greater insight into the inflation trends late last year. The core median and trim indexes both inched up less than 0.1%. As a result, the average of the three-month annualized rates plunged to 1.66%, down sharply from 2.31% in November. That’s the slowest pace since early 2024.
“We continue to believe that inflationary pressures are tame enough for the Bank of Canada to place less weight on the upside risks to consumer prices. That said, the economy has held up well enough for central bankers to remain on the sidelines. Government of Canada bond yields at the short end of the curve have drifted lower since the release reflecting the underlying weakness in price growth.”
- Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
The Bank is Expected to Stand Pat Until Early 2027
“The Bank of Canada won’t be swayed by month-to-month fluctuations in headline inflation due to base-year effects. Instead, it will likely continue to focus on the trend in underlying inflation, which we and the Bank of Canada think remains in the mid-2% range. With ongoing upside risks to inflation from US tariffs and elevated trade policy uncertainty, we continue to believe the Bank of Canada will hold rates at 2.25% until early 2027.”
- Michael Davenport, senior Canada economist at Oxford Economics
Inflation to Continue to Moderate Over the Next Year
“Headline inflation in December was boosted by comparisons to last year’s GST holiday, but zeroing in on core measures shows inflation in Canada has cooled. Underlying inflation is still above the 2% target on a year-on-year basis, but it is getting a lot closer in recent months.
“Overall, December’s data is consistent with our expectation for inflation to moderate to the Bank’s target over the next year, as past inflation problem areas, like rents, continue to cool.”
- Leslie Preston, managing director and senior economist at TD Bank
