December CPI drops to 1.8% due to tax holiday

Canadian inflation ticked down slightly in December, easing costs of consumers and raising the likelihood of another Bank of Canada (BoC) rate cut in its next announcement on January 29th.

According to Statistics Canada, the Consumer Price Index (CPI) rose 1.8% year over year, down a smidge from November’s 1.9% reading. This was a tad lower than expected; an economist consensus from a Reuters poll had forecasted the measure would stay untouched. On a monthly basis, the CPI dipped by 0.4%, after zero movement in November.

StatCan points to the temporary GST/HST break, which was introduced on December 14 for certain product categories, as the main factor subduing inflation growth. This impacted 10% of the all-items basket used to calculate the CPI, including:

• Food
• Alcoholic beverages
• Tobacco products and recreational cannabis
• Recreation
• Education
• Reading
• Clothing and footwear

Also read: What Canada’s two-month GST/HST tax holiday means for you

“Food purchased from restaurants and alcoholic beverages purchased from stores contributed the most to the deceleration,” states StatCan’s release, adding that with the food component stripped out, CPI rose by 2.1% in December. 

According to StatCan, as a result of the tax break, Canadians paid 1.6% less year-over-year for food purchased in restaurants, 1.3% less for alcoholic beverages, and 7.2% less for toys and games.

However, these declines were offset in December by a 3.5% increase in gas prices, following a 0.5% decline in November. This was mainly due to a base-year effect, as gas prices had dropped 4.4% the previous December. On a monthly basis, gas prices were down 0.6%.

Shelter inflation falls due to rate cuts

Another major component of the CPI basket, shelter costs, also grew at a slower pace at 4.5% compared to 4.6% in November. This was largely due to falling mortgage rates, following the 50-basis-point rate cut implemented by the BoC on December 11. According to the report, mortgage interest costs decelerated for the 16th consecutive month, with an 11.7% year-over-year increase – the smallest recorded since October 2022.

Rent price growth also slowed in December, rising 7.1% compared to 7.7% in November. Overall, though, rent costs remain elevated, having increased 22.1% since December 2021.

How will the December CPI impact the Bank of Canada?

While the central bank’s Governing Council has stated it plans to reel in the pace and size of rate cuts in 2025, this latest inflation reading provides incentive for another 25% decrease this month. In addition to the lower headline number, the specific inflation measures tracked by the BoC both decreased. The CPI trim, which strips out high and low extremes in prices, fell to 2.5% from 2.6% in November, while the CPI median – which measures the middle of the CPI basket – softened to 2.4% from 2.6%.

The biggest wildcard facing the BoC, though, is what’s happening south of the border, and whether US President Donald Trump will indeed implement 25% tariffs on Canadian exports starting on February 1st.

Should that occur, and the Canadian government retaliates with trade restrictions of their own, it would push inflation higher, undoing the progress the BoC has achieved so far in bringing the measure back down to its 2% target. Economists have speculated that should this actually happen, the BoC’s focus would be to maintain that target at all costs, especially if the Canadian economy and jobs market struggle.

In an economic note published after the inflation release, Douglas Porter, BMO’s Chief Economist and Managing Director of Economics, wrote that the BoC will most likely cut in its next announcement to provide additional buffer against potential tariff shocks.

“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%,” he writes. “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.”

Also read:

• Lower rates improved housing affordability across most of Canada in 2024
• What Canada’s two-month GST/HST tax holiday means for you
• Bank of Canada cuts target interest rate by 0.5% in December 2024 announcement
• Canadian CPI falls to 1.9% in November