Introduction to Canada’s Inflation Rate
Canada’s consumer prices rose by 2.4% in December, which is higher than the expected 2.2% rate. This increase is largely due to the base effect of the previous year’s sales tax break. However, the core measures of inflation, which are closely watched by economists, cooled for the third consecutive month.
Monthly and Annual Inflation Rates
On a monthly basis, the consumer price index declined by 0.2%, which is less than the expected 0.3% decrease. The annual inflation rate was driven by a temporary sales tax break on certain food and children’s items in the comparative December 2024 period. Restaurant prices, which were affected by the tax holiday, were the largest contributor to the acceleration in the annual inflation rate in December 2025.
Core Inflation Measures
The Canadian central bank’s preferred measures of core inflation, CPI-median and CPI-trim, continued to ease and were the lowest since December 2024. CPI-median cooled to 2.5% from 2.8% in November, while CPI-trim decreased to 2.7% from 2.9%. These measures are important indicators of underlying inflation trends.
Impact on Interest Rates
The deceleration in core prices should allow the Bank of Canada to keep interest rates on hold. Economists believe that the Bank of Canada will not change its key policy rate, which is currently at 2.25%. Money markets also expect rates to stay unchanged this year.
Effect on the Canadian Dollar
The Canadian dollar was trading 0.3% higher at 1.3880 per US dollar, or 72.05 US cents, as the US dollar posted broad-based declines. This increase in the Canadian dollar is a result of the inflation report, which showed that underlying inflation is close to the Bank of Canada’s 2% target.
Sector-Specific Inflation
Excluding volatile food and energy, inflation rose 2.5% in the month. Services price inflation in December accelerated to 3.3% from 2.8% in November, while goods prices rose by 1.2% after 1.5% in the previous month. The rise in services inflation was driven by increases in restaurant prices, while the decline in goods inflation was driven by a year-over-year decline in prices for gasoline.
Annual Average Inflation
On an annual average basis, prices increased 2.1% last year, following a 2.4% rise in 2024. This decrease in annual average inflation is a sign that the economy is slowing down.
Conclusion
In conclusion, Canada’s inflation rate rose by 2.4% in December, driven by the base effect of the previous year’s sales tax break. However, core inflation measures cooled for the third consecutive month, which should allow the Bank of Canada to keep interest rates on hold. The Canadian dollar increased in value as a result of the inflation report, and sector-specific inflation rates showed that services inflation is accelerating while goods inflation is declining. Overall, the inflation report suggests that the Canadian economy is slowing down, and the Bank of Canada is likely to keep interest rates unchanged this year.
