‘Messy’ inflation report unlikely to push BoC toward more cuts, economists say
Canada’s latest inflation report is unlikely to change the Bank of Canada’s policy outlook, despite a slightly higher headline reading in December, according to BMO chief economist Doug Porter.
“Given the big weight of some special factors in this messy month, we believe the mild core news in this report counters some of the bad news,” Porter said, noting that while inflation came in above expectations, the details were mixed. “The Bank will likely be encouraged by the pullback in most core CPI measures. However, there certainly is not enough here to push the BoC toward more cuts.”
Statistics Canada said the Consumer Price Index rose 2.4% year over year in December, up from 2.2% in November. The acceleration was largely driven by a base-year effect tied to the temporary GST/HST break that began in mid-December 2024. Prices for tax-exempt items fell during that period last year, and those declines have now dropped out of the annual comparison, putting upward pressure on headline inflation.
Gasoline prices helped moderate the increase, falling 13.8% from a year earlier. Excluding gasoline, inflation was firmer, with the CPI rising 3% year over year, compared with 2.6% in November.
On a monthly basis, consumer prices fell 0.2% in December, though they rose 0.3% after seasonal adjustment.
Eating out contributed most to higher inflation
Price growth was strongest in categories affected by last year’s tax break. Restaurant meal prices jumped 8.5% year over year, compared with a 3.3% increase in November, making them the largest contributor to faster inflation. Prices also rose more quickly for alcoholic beverages, toys, children’s clothing and snack foods.
Grocery prices continued to climb, rising 5% from a year earlier, with coffee prices up 30.8% and fresh or frozen beef up 16.8%.
RBC senior economist Nathan Janzen said the data still point to inflation moving closer to the Bank of Canada’s target. “The BoC will be encouraged by further signs that inflation is broadly trending back towards the 2% target,” he said, adding that the broader economic backdrop has stabilized and the unemployment rate has begun to edge lower. With interest rates already near neutral, Janzen said there is little reason for the central bank to cut rates further as long as inflation remains at or above target.
Inflation accelerated in nine provinces in December, though British Columbia saw slower growth due to a sharp year-over-year drop in traveller accommodation prices.
“Perhaps the main takeaway here is that after a year of some wide divergences, almost all of the main measures of inflation are now very close to 2.5%, in tune with the Bank of Canada's view on the pace of underlying inflation. That's also where we expect inflation to average for all of 2026, after rising 2.1% last year,” Porter said.
