Key Takeaways
- Inflation in Canada rose to 2.4% in December, exceeding expectations of 2.2%
- The increase was largely due to the rebound from the federal government’s temporary tax holiday
- Economists believe the Bank of Canada will hold interest rates steady at 2.25% later this month
- Core inflation metrics are moderating, suggesting little cause for alarm
- The Bank of Canada’s business outlook survey showed trade-related uncertainty and tariffs continue to weigh on confidence
Introduction to Inflation Trends
Inflation in Canada ended 2025 with a surprise uptick, rising to 2.4% in December, according to Statistics Canada. This exceeded the expectations of economists, who had predicted the annual inflation rate would hold steady at 2.2%. The rebound from the federal government’s temporary tax holiday was cited as the main driver of the acceleration. The tax holiday, which took GST off certain items for two months starting mid-December 2024, dropped prices for dining out, alcohol, children’s toys, and more a year earlier, leading to a higher year-over-year comparison.
Impact of Tax Holiday on Inflation
The tax holiday had a significant impact on the consumer price index, particularly in the categories of restaurant meals and food bought from grocery stores. The price of restaurant meals rose 8.5% annually, fueling the acceleration in the headline number. The price of food bought from grocery stores rose 5% annually, up from 4.7% in November. Some grocery items, including potato chips and confectionary goods, saw annual price jumps in December due to the tax holiday. However, Andrew Grantham, senior economist at CIBC, noted that the federal tax relief was only partially responsible for grocery inflation in December and that prices were stable after a hike recorded in November.
Volatility in Food and Transportation Costs
The December inflation figures also showed volatility in food and transportation costs. The price of coffee rose more than 30% in December, while the cost of fresh or frozen beef rose 16.8%. The cost of air transportation surged 34.5% month-over-month, outpacing the previous year’s holiday price hike. The cost of travel tours also rose on a monthly basis, due to higher prices for U.S. destinations. Grantham said that while the distortion from the tax holiday was expected, the jump in transportation costs caught forecasters off guard.
Interest Rate Decision
The December inflation figures are the Bank of Canada’s last look at price data before it makes its first interest rate decision of the year. The central bank held its benchmark interest rate steady at 2.25% in December. Financial market odds for a rate hold on January 28 stood at 84% as of Monday afternoon. Economists, including Grantham and Leslie Preston of TD Bank, believe that the Bank of Canada will hold interest rates steady, citing moderating core inflation metrics and signs of weakness elsewhere in the economy.
Economic Outlook
The Bank of Canada’s fourth quarter business outlook survey showed trade-related uncertainty and the broad economic effects of tariffs continued to weigh on confidence in the final quarter of 2025. However, firms reported rosier sales outlooks than earlier in the year when fears over tariffs were more pronounced. The central bank’s separate survey of consumers suggested high prices and trade uncertainty continue to hound Canadians. Consumers most frequently pointed to tariffs as the factor they believe is affecting inflation. BMO senior economist Shelly Kaushik noted that while forecasters at the bank still see the policy rate holding steady through 2026, "risks are skewed to further easing if sour sentiment drives a weaker growth outlook and inflation slows."
Conclusion and Future Outlook
In conclusion, the surprise uptick in inflation in December was largely due to the rebound from the federal government’s temporary tax holiday. While the increase was unexpected, economists believe that the Bank of Canada will hold interest rates steady, citing moderating core inflation metrics and signs of weakness elsewhere in the economy. The Bank of Canada’s business outlook survey and consumer survey suggest that trade-related uncertainty and tariffs continue to weigh on confidence, but firms are reporting rosier sales outlooks. As the Bank of Canada makes its first interest rate decision of the year, it will be closely watching the economy and inflation trends to determine the best course of action.
