Given all the disturbing news and economic uncertainty swirling around out there, it’s a welcome reprieve that the inflation rate in Canada, which was adding significantly to the drama not that long ago, largely cooperated in December.

The monthly headline inflation rate in Canada ended the year at 2.4%, up from November’s reading of 2.2% and 0.4 points above the 2% target. Lower year-over-year (y/y) gasoline prices (-13.8%) helped keep overall inflation in check.

The acceleration in the headline inflation rate would normally raise eyebrows at the Bank of Canada. But it was driven by an anomaly: the GST/HST holiday on things like restaurant meals and children’s clothing that took effect on December 14, 2024 and ended February 15, 2025.  This means consumer prices were temporarily lowered in December 2024, which in turn raises the year-over-year price increase.

Looking at the core readings, both CPI-median and CPI-trim continued to ease in December, falling to 2.5% y/y and 2.7% y/y, respectively. Although still above target, it’s encouraging that the trend is downward. Even more encouraging is a slowdown in the month-over-month changes in these core metrics over the last two months. 

Despite the relatively soft overall rate, grocery prices were up by 5% y/y in December. While some of this can be attributed to the tax holiday from the year before, because most basic grocery items are GST/HST exempt, it is not the determining factor. It is, however, a major reason why the cost of food purchased from restaurants was up by 8.5% y/y in December versus 3.3% y/y in November.

Base-year effects or not, Canadian consumers will be feeling these price increases and this will add to concerns about the rising cost of living.

Interest rate implications: With headline inflation largely under control and the core readings trending lower, December’s inflation report reinforces our call that the Bank of Canada will hold at its 2.25% policy rate through 2026. It will continue its “wait and see” approach, and may even consider a hike if the economy picks up steam.

Alberta: At 2.1%, the y/y inflation rate in Alberta in December was lower than the national average, but up from November’s rate of 1.9%. An even larger drop in natural gas and gasoline prices in the province helped keep Alberta’s rate below Canada’s. The fact that there is no HST in Alberta also meant that the rise in restaurant prices in December compared to December 2024 was more modest at 4.2%.