A second consecutive month of Canadian inflation slowing has strengthened expectations for the Bank of Canada to make continued (but more measured) rate cuts in 2025.
The December Consumer Price Index report released by Statistics Canada shows the tax holiday that started Dec. 14 dragged down Canada’s annual inflation rate to 1.8% for the month, from 1.9% in November, on a year-over-year basis. The slight dip has solidified analyst expectations for a modest 0.25% snip by the Bank of Canada at its Jan. 29 meeting.
The national statistics agency reported that the CPI drop was led by declines in the costs of restaurant food, alcohol, and children’s clothing, all of which were brought down by the ongoing two-month tax holiday. The impact of the sales tax break, which affects 10% of the CPI basket, is expected to be more pronounced in January, when it will be reflected in prices for the full month.
In a departure from the previous month, the headline inflation numbers were accompanied by a slight easing of core inflation measures such as trim inflation (2.5%, down from 2.6% in November) and median (2.4%, from 2.6% in November). Core inflation measures strip out volatile components of food and energy prices to provide a clearer picture of underlying inflation trends. Trim inflation excludes the most extreme price changes (both the highest and the lowest) from a basket of goods and services. Median inflation identifies the price changes that sit at the midpoint of all items in the consumer price index. However, shelter prices (rent and mortgage costs) ticked 0.3% higher from the month before and rose 4.5% on an annual basis.
The following are highlights from commentary on the December CPI report in analyst notes to clients.
Matthieu Arseneau, economist at the National Bank of Canada
“Headline inflation in December was exactly in line with economists' consensus, but this does not mean that inflationary pressures were contained. In fact, excluding indirect taxes, which fell as a result of the GST/HST holiday, inflation was 0.06%, the biggest increase in December since 2007.
“Inflation usually reacts to the economic environment with some lag, and we see no reason why this time should be any different. Some wonder whether this rise in inflation is due to imported inflation in the context of a weakening currency. We can be reassured on this point, as goods inflation remains low. For these reasons, as well as the uncertainty created by trade tensions with the United States, we believe that the Bank of Canada should continue to ease monetary policy by cutting its policy rate by 25 basis points next week. This would give us a little more hope of seeing economic growth above potential assuming Canada is able to avoid a tariff war with our largest trading partner.”
Lenoy Dujon, economist at Morgan Stanley
“With inflation well-behaved and the Bank [of Canada] still focused on lifting economic growth, the Bank expects ‘further rate cuts in the future’. However, the timing and pace of future rate cuts still depend on the incoming data. As the Bank has shifted toward a ‘more gradual approach’ to monetary policy, we maintain our call for a 25-basis-point rate cut at the Bank’s Jan. 29 meeting.”
Douglas Porter, chief economist at BMO Economics
“The headline dip in inflation was clearly flattered by the GST holiday, which will help again in next month’s reading for January, but then reverse over the next two months. And the news on core also wasn’t exactly friendly, with the three-month trend in the two major measures forging back above 3%. Even so, we believe that the heavy overhang of trade uncertainty—possible U.S. tariffs—overrides almost all else. As a result, we suspect that today’s reading is just good enough to allow the Bank of Canada to trim next week, for risk management purposes.”
Tiago Figueiredo, macro strategist at Desjardins Capital Markets
“Canadian consumer prices fell materially in December thanks to the GST holiday. The Bank of Canada’s core measures rely on data that exclude taxes and, therefore, provide a cleaner reading of underlying inflation. The average monthly change of the core median and trimmed mean measures rose 0.26%, pushing the average of the three-month annualized rates up to 3.6% from 3.3% in November.
“We don’t believe central bankers will be too fussed with the slight increase in monthly and three-month annualized core inflation. Nothing in this release changes our view that the Bank of Canada will cut its policy rate by 25 basis points next week. However, the recent reacceleration in core price growth, if sustained, could prompt central bankers to hold rates in March. Of course, US trade policy will be more important to the path of rates than any wiggles in the inflation data. Even this morning, markets are paying more attention to the new administration’s policy agenda.”
Andrew Grantham, senior economist at CIBC Economics
“As the tax break came into effect mid-month, a further impact is expected to be seen in January when prices during the full month were subject to the lower rate. In areas not impacted by the tax change, travel services and accommodation accelerated, albeit partly driven by increases in British Columbia linked to the Taylor Swift concert. The Bank of Canada’s CPI-trim and median measures of inflation were likely less impacted than the headline by temporary factors, but also decelerated to 2.4% and 2.5% year-over-year.
“Overall, there are a lot of moving pieces and temporary factors playing out in the inflation data at the moment. But through the volatility underlying price pressures appear to be close to 2% and we continue to expect a 25-basis-point reduction in interest rates from the Bank of Canada next week.”
Leslie Preston, managing director and senior economist at TD Bank
“December’s inflation data came in line with the Bank of Canada’s expectations for inflation to average close to 2%. Despite the tax-cut-driven dip in headline inflation, core inflation pressures have picked up over the past three months, suggesting that inflation readings are likely to move up a bit in the months ahead. This will give the Bank of Canada a reason to adopt a more gradual pace of interest rate cuts this year. We expect a quarter-point cut at every other decision in 2025.
“Tariffs on Canadian exports didn’t come on day one of the new administration, but President Trump does plan to establish an ‘External Revenue Agency’ largely to collect tariffs, and Trump reiterated threats of a 25% tariff on Canada and Mexico, now due on Feb 01. This creates a very challenging backdrop for Canada’s economy, and we expect the Bank of Canada to cut rates a quarter point next week, which would put interest rates further into ‘neutral’ territory – a stance we think is warranted given relatively soft demand backdrop for Canada’s economy.”
Tu Nguyen, economist at assurance, tax, and consultancy firm RSM Canada
“Even though the impact of the tax holiday will be temporary, disinflation is a clear trend that has persisted and calls for more rate cuts from the Bank of Canada.
“Even with higher than seasonally usual gasoline prices and higher base effects, the Consumer Price Index rose only 1.8% in December and declined 0.4% on a monthly basis. The Bank of Canada has a tricky job navigating the waters ahead, with the Canadian dollar weakening and trade policy uncertainty. We expect the Bank to slow down the pace of rate cuts, with a 25 basis point cut at the end of this month. This cut will mark a further deviation from the Federal Reserve but might be necessary to maintain price stability and boost growth.”
Charles St-Arnaud, chief economist at Alberta Central
“Overall, nothing in today’s report could suggest the Bank of Canada would change course and stop its easing cycle. With inflation in line with the target, it is unlikely to be the Bank of Canada’s main worry at this point. Nevertheless, the stickiness of the Bank of Canada’s core measures will require close monitoring. The Bank’s focus remains primarily on the downside risks to growth, from weaker consumer spending, lower population growth, and the threat of US tariffs.
“Lower population growth next year will be a major drag on the economy, pushing potential growth and the neutral rate lower. With this in mind, we expect the Bank of Canada to ease by 25 basis points at the January meeting and to bring its policy rate to 2.0% in 2025, implying a 125-basis-point reduction over the course of the year, as long as inflation remains consistent with the Bank of Canada’s target.”
Nathan Janzen, assistant chief economist at Royal Bank of Canada
“Controlling for the tax distortion, price growth was mixed but is still consistent with further signs of underlying easing in price growth.
“The CPI data will be impacted by the tax holiday into February, but a weakened Canadian GDP and elevated unemployment rate (with the potential for protectionist US trade policy to make both worse) is pushing inflation expectations from businesses and households lower. That leaves the risks on price growth tilted to the downside and argue for further Bank of Canada interest rate cuts.”
Stephen Brown, deputy chief North America economist at Capital Economics
“The small fall in headline inflation to 1.8% in December is not as encouraging as it looks, with the details suggesting that a higher proportion of the GST holiday was captured by the price surveys than we had expected. Were it not for the threat of US tariffs hanging over the economy, it would be easy for the Bank of Canada to justify a pause at its meeting next week.
“Nonetheless, it still seems likely that the Bank will cut by 25 basis points again next week. The recent pick-up in core inflation pressures is probably partly due to the weakening of the loonie, which is in turn related to the threat of tariffs from the US rather than solely reflecting domestic factors. Even if President Donald Trump does not follow through with his most recent threat to impose a 25% tariff on Canada on February 01, that rhetoric will hit business and consumer confidence and suggests that the economy would still benefit from additional monetary support.”
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