Key Takeaways
- Headline inflation accelerated to 2.4 per cent in December, driven largely by base effects from the end of a temporary GST/HST tax break.
- Core inflation measures continued to ease, with CPI-trim and CPI-median slowing to multi-year lows, signalling contained underlying inflation pressures.
- A sharp month-over-month jump in air transportation prices boosted the headline figure, but appeared linked to seasonal travel patterns and capacity constraints.
- Limited pricing power among businesses suggests firms are struggling to pass higher costs on to consumers, reinforcing signs of labour market softness.
- The Bank of Canada is expected to hold interest rates steady on Jan. 28, with trade uncertainty likely keeping policymakers on the sidelines through much of 2026.
Introduction to Inflation Data
Canada’s inflation rate rose more than expected in December, with a headline inflation rate of 2.4 per cent. This increase was largely driven by base effects from the end of a temporary GST/HST tax break, rather than renewed price momentum. According to Dominique Lapointe, director of macro strategy at Manulife Investment Management, the inflation data reveals that consumer pressures, hiring conditions, and the Bank of Canada’s monetary policy are all interconnected. Lapointe notes that the rise in inflation is not a cause for concern, as the underlying inflation pressures are still contained.
Breaking Down the Inflation Numbers
The inflation data shows that food inflation in Canada is rising, with a rate above six per cent. This is a worrying trend, as it can have a significant impact on consumer spending and overall economic growth. However, this increase is being offset by a downward trend in gasoline prices, which are lower than a year ago, as well as moderating shelter costs. For example, mortgage interest cost inflation is easing as people refinance at slightly lower rates than last year, and home prices in some markets are also moderating, which has a dampening effect on overall inflation. The sharp month-over-month jump in air transportation prices, which rose by 35 per cent, is also a notable trend. This increase is likely linked to seasonal travel patterns and capacity constraints, rather than any underlying strength in the economy.
Impact on Businesses and Hiring
The limited pricing power among businesses suggests that firms are struggling to pass higher costs on to consumers, reinforcing signs of labour market softness. According to Lapointe, hiring across the economy is, at best, stabilizing, and hiring intentions among both small and large businesses remain weak. Job vacancies are also very low, which is a concern for the overall health of the labour market. The Business Outlook Survey released earlier in the year shows that more firms are reporting rising input costs than rising output prices, which indicates that businesses are struggling to maintain profitability in the face of rising costs.
Bank of Canada’s Monetary Policy
The Bank of Canada is expected to hold interest rates steady on Jan. 28, with trade uncertainty likely keeping policymakers on the sidelines through much of 2026. According to Lapointe, the core inflation measures, such as CPI-trim and CPI-median, are still above two per cent, but the moderation in these measures is a positive signal. It suggests that there isn’t significant underlying price pressure across the economy. The Bank of Canada focuses closely on these core inflation measures, and the easing of these measures is a sign that the economy is not overheating. As a result, the Bank of Canada is unlikely to change course or cut interest rates any further at the start of this year.
Conclusion
In conclusion, the latest inflation data from Canada shows that headline inflation accelerated to 2.4 per cent in December, driven largely by base effects from the end of a temporary GST/HST tax break. However, the underlying inflation pressures are still contained, and the core inflation measures are easing.