Canada’s Inflation Down to 1.8% in December

Canada’s annual inflation rate eased to 1.8% in December, down slightly from 1.9% in November. This reduction was largely attributed to the federal government’s temporary GST tax break, which lowered prices on restaurant meals, alcohol, children’s clothing, toys, and other items. The move has sparked discussions about its broader implications for the economy and the Bank of Canada’s monetary policy decisions.

Key Drivers of the December Slowdown

Statistics Canada reported that the GST tax break, implemented in mid-December, affected about 10% of the items in the Consumer Price Index (CPI) basket. The most significant price reductions were observed in:

• Restaurant Food Prices: Down 1.6% year-over-year and 4.5% month-over-month.
• Alcoholic Beverages: Declined 1.3% annually and 4.1% monthly.
• Toys and Games: Dropped 7.2% in December, compared to a 0.6% decline in November.

Despite these reductions, shelter costs remained elevated, with a 4.5% annual increase. Rent inflation slowed to 7.1% in December, while the mortgage interest cost index decelerated to 11.7%.

Without the GST tax break, Statistics Canada estimated that the inflation rate would have risen to 2.3%.

The Broader Inflation Landscape

Economists note that while the GST tax break provided temporary relief, underlying inflationary pressures remain close to the Bank of Canada’s 2% target. December’s numbers were further complicated by seasonal factors such as Boxing Day and carryovers from Black Friday sales, which typically result in discounted prices.

Food and Gas Prices:

• Growth in grocery prices slowed to 1.9% annually, compared to 2.6% in November.
• Gas prices increased 3.5% year-over-year, adding to ongoing consumer cost pressures.

Implications for Monetary Policy

With the Bank of Canada’s next interest rate decision looming, economists are divided on the path forward: Will the central bank reduce its rates next week? Many expect the central bank to implement a 25-basis-point rate cut, building on the half-point reduction in December. As CIBC economist Andrew Grantham observed, “There are a lot of moving pieces and temporary factors playing out in the inflation data. Risk management might prompt another rate cut.”

However, external risks could complicate matters. Chief among them is the potential for U.S. tariffs, with President Donald Trump recently considering imposing a 25% tariff on Canadian goods. If implemented, such tariffs could necessitate more aggressive rate cuts to support the economy.

What’s Next?

January’s inflation data is expected to provide a clearer picture of the GST tax break’s full impact, as it will reflect a full month of reduced rates. Meanwhile, businesses and consumers are bracing for potential economic turbulence tied to trade uncertainties.

While temporary measures like the GST holiday offer short-term relief, sustained efforts will be needed to address structural inflationary pressures. As we move forward, the interplay between domestic policy and international trade dynamics will be crucial in shaping Canada’s economic trajectory.