Canada Inflation Rises to 2.4% in December as Core Price Pressures Continue to Cool

OTTAWA — Canada’s inflation rate accelerated more than expected in December, rising to 2.4% year over year, according to new data released by Statistics Canada. The increase was largely driven by temporary factors linked to last year’s sales tax holiday, while underlying inflation pressures continued to show signs of easing — a development likely to reassure policymakers at the Bank of Canada.

Economists surveyed by Reuters had expected inflation to remain unchanged from November’s 2.2% reading. Instead, the headline figure moved higher, reflecting base effects from a tax break introduced in December of the previous year under the Liberal government led by former Prime Minister Justin Trudeau.

On a monthly basis, consumer prices fell 0.2%, a slightly smaller decline than the 0.3% drop anticipated by markets. While the monthly decrease suggests limited short-term price momentum, the annual uptick drew attention as inflation continues to hover above the central bank’s 2% target.

Core Inflation Continues to Cool

Despite the stronger headline number, the Bank of Canada’s preferred measures of core inflation showed further moderation for a third consecutive month. CPI-median, which represents the middle value of monthly price changes, eased to 2.5% in December from 2.8% in November. CPI-trim, which strips out the most extreme price movements, slowed to 2.7% from 2.9%.

Both measures were at their lowest levels since December 2024, reinforcing the view that underlying inflation pressures are gradually moving closer to the central bank’s target.

Economists say the steady cooling in core inflation strengthens the case for keeping interest rates unchanged in the coming months. The Bank of Canada held its benchmark overnight rate at 2.25% in December, signaling confidence that current policy settings are sufficient to guide inflation back toward target.

“Despite a somewhat stronger-than-expected headline reading, today’s data are still consistent with underlying inflation being close to 2%,” said Andrew Grantham, senior economist at CIBC Capital Markets. “As a result, we continue to see no change in the Bank of Canada overnight rate throughout 2026.”

Markets React Calmly

Financial markets showed little sign of alarm following the release. The Canadian dollar strengthened modestly, rising about 0.3% to trade at 1.3880 per U.S. dollar, or roughly 72.05 U.S. cents, as the U.S. currency weakened broadly.

Money markets continue to price in a stable rate environment, with expectations that the Bank of Canada will hold borrowing costs steady through the year barring a major economic shock.

Jessica Hinds, a director in Fitch Ratings’ economics team, described the December inflation data as “highly unlikely to change the calculus” for the central bank, emphasizing that temporary factors rather than renewed inflationary momentum were behind the headline increase.

Tax Holiday Distorts Annual Comparison

Statistics Canada noted that December’s rise in annual inflation was heavily influenced by the absence of a temporary sales tax break that had lowered prices a year earlier. The tax holiday, which applied to certain food items and children’s products, created a favorable comparison in December 2024 that exaggerated this year’s annual increase.

Restaurant prices — one of the sectors affected by the earlier tax relief — emerged as the single largest contributor to the acceleration in headline inflation in December. As prices normalized following the end of the tax break, year-over-year comparisons appeared stronger even though underlying demand remained stable.

Energy Prices Provide Offset

Helping to contain overall inflation was a sharp decline in gasoline prices. Fuel costs fell 13.8% year over year in December, following a 7.8% drop in November, providing significant relief to households and partially offsetting increases in service-related expenses.

When excluding volatile food and energy prices, inflation rose 2.5% in December, a level that remains broadly consistent with the Bank of Canada’s medium-term target.

Services inflation accelerated to 3.3% from 2.8% in November, reflecting persistent cost pressures in labor-intensive sectors. Meanwhile, goods inflation slowed, with prices rising 1.2% after a 1.5% increase the previous month.

Annual Inflation Trends Stabilize

On an annual average basis, consumer prices increased 2.1% last year, down from a 2.4% rise in 2024. The trend suggests that inflation is gradually stabilizing after several years of volatility driven by global supply disruptions, energy price swings, and aggressive interest rate hikes.

For policymakers, the December data reinforces a cautious but steady outlook. While headline inflation may fluctuate in the near term due to technical factors, the broader trajectory appears consistent with a soft landing for the Canadian economy.

As one economist put it, the numbers offer “little urgency to move rates in either direction,” giving the Bank of Canada room to wait for clearer signals before adjusting policy.