Economists say tax distortions aside, cooling core inflation lets the Bank of Canada stay on hold
Headline inflation in Canada ticked higher in December, but markets still see easing core price pressures and a Bank of Canada that looks set to stay on hold.
Statistics Canada said December’s consumer price index rose 2.4 percent year over year, up from 2.2 percent in November and above economist forecasts for no change.
On a monthly basis, prices fell 0.2 percent, a slightly smaller decline than markets expected.
The main driver was a base effect from Ottawa’s 2024 GST holiday.
As BNN Bloomberg reported, the previous Liberal government headed by former Prime Miniter Justin Trudeau temporarily removed GST on restaurant food, some children’s items and certain alcoholic beverages for two months starting 14 December 2024.
That cut prices a year ago and now makes annual inflation look higher as those unusually low readings drop out.
Statistics Canada said this base‑effect distortion made restaurant prices the largest contributor to the pick‑up in December.
The agency reported an 8.5 percent annual increase in restaurant meals, the biggest rise since 1991, when the goods and services tax was first implemented, as cited by BNN Bloomberg.
Food remains a pain point.
Grocery prices were up about 5 percent year over year in December, with Statistics Canada highlighting that coffee prices rose more than 30 percent and fresh or frozen beef climbed 16.8 percent.
In its annual review, CBC News said grocery prices increased 3.5 percent on average in 2025, compared to 2.2 percent in 2024, driven by higher prices for coffee, cocoa beans and sweets.
RBC assistant chief economist Nathan Janzen warned in the Financial Post that “the rise in food prices will continue to raise concerns about affordability, particularly at the lower end of the income distribution.”
However, he argued “there is little the Bank of Canada can do about higher grocery prices, which have been driven by global commodity price trends, and reduced cattle inventories that have been putting upward pressure on meat prices.”
Energy moved in the opposite direction.
BNN Bloomberg all noted that gasoline prices fell 13.8 percent year over year in December, after a 7.8 percent drop in November, with Statistics Canada pointing to an oversupply of crude oil globally.
Reuters said the Bank of Canada’s preferred measures, CPI‑median and CPI‑trim, cooled for a third straight month to 2.5 percent and 2.7 percent respectively, the lowest since December 2024.
Bloomberg reported that the average of those two slowed to 2.6 percent year over year and 1.7 percent on a three‑month annualised basis.
CBC News noted that almost all main inflation gauges now sit close to 2.5 percent, in line with the Bank of Canada’s own view of underlying price growth.
Economists see that as enough for the Bank to stay sidelined.
The central bank held its policy rate at 2.25 percent in December and said this level was “about the right level to keep inflation close to its 2 percent target,” according to Reuters.
BNN Bloomberg reported that market odds of a hold at the 28 January decision stood around 84 percent as of Monday afternoon, while Reuters said money markets expect rates to stay unchanged this year.
Bloomberg reported that markets see the Bank on hold for most of 2026.
Andrew Grantham, senior economist at CIBC, told Reuters that “today’s data are still consistent with underlying inflation being close to 2 percent, and as a result we continue to see no change in the Bank of Canada overnight rate throughout 2026.”
He told BNN Bloomberg that December’s jump “appeared to be caused by a couple of volatile elements.”
He said the economy “really need[s] (monetary) policy below a neutral rate, or at least to the bottom of that neutral range, to help us through this period of uncertainty,” and that “today’s inflation numbers don’t change that picture.”
BMO chief economist Doug Porter called it a “messy month” for inflation and wrote, as cited by CBC News, that “the Bank will likely be encouraged by the pullback in most core [inflation] measures.”
At the same time, he argued that “there certainly is not enough here to push the BoC toward more cuts,” and added, “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.”
TD Economics senior economist Leslie Preston wrote in notes cited by BNN Bloomberg that underlying inflation appears to be above 2 percent “but it is getting a lot closer in recent months.”
She said “headline inflation in December was boosted by comparisons to last year’s GST holiday.” However, she added that focusing on core measures shows inflation in Canada has cooled.
She concluded that “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.”
Servus Credit Union chief economist Charles St‑Arnaud said in a note reported by Bloomberg that the Bank of Canada expected a base effect from the 2024 tax holiday and that other indicators suggest underlying inflation is below 3 percent.
He wrote that there was “nothing in today’s report to be of immediate concern for the Bank of Canada” and said he expects the bank to keep its policy rate at 2.25 percent for an extended period.
Speaking on BNN Bloomberg Television, he added, “I don’t see anything in the report today that would change my view on the Bank of Canada,” and said the central bank is “happy with where rates stand at the moment.”
Royce Mendes, managing director and head of macro strategy at Desjardins, wrote in the Financial Post that inflationary pressures are “tame enough for the Bank of Canada to place less weight on the upside risks to consumer prices,” but that the economy has held up well enough for policymakers “to remain on the sidelines.”
Jessica Hinds, a director in Fitch Ratings’ Economics team, said the data were “highly unlikely to change the calculus” for the central bank, according to Reuters.
CBC News reported that, on an annual average basis, inflation rose 2.1 percent in 2025 after a 2.4 percent increase in 2024, the smallest yearly gain since 2020, but that prices have still risen 19.9 percent over five years.
Statistics Canada reported that service inflation eased to 3.1 percent from 4.1 percent as mortgage interest costs and shelter price growth slowed with earlier rate cuts, while goods inflation picked up, led by passenger vehicles and groceries.
