In the last inflation report of the year, the annual inflation rate for Canada remained unchanged at 2.2% in November. We head into 2026 with progress made in the inflation battle, but with the Bank of Canada in a ‘wait and see’, data dependent, mode as it looks for a sustainable return to its 2% inflation target.

Data reinforces Bank of Canada hold

If the Bank had this inflation report before last Wednesday’s rate hold decision, would they have done anything differently? No. November inflation was largely in line with consensus expectations (based on Bloomberg). If anything, inflation in Q4 is coming in a bit hotter than expected (tracking 2.2% vs. 2% in the Bank’s October forecast), reinforcing their decision to hold.

Our December forecast has the Bank on hold through 2026 with recent economic data coming in better than expected and underlying inflation still a bit elevated (more below). As I discuss with Mark Johnson from the ATB Capital Markets rates desk, one cannot rule out some chance of a rate hike next year (not our forecast, but it’s a risk).

Food and gasoline prices add to inflation, rents subtract

Food prices were one of the main culprits during the 2022-23 inflation spike, and they are proving to be a durable force. Grocery prices jumped 4.7% year-over-year (y/y) last month. As I sip my cup of Joe, I did a double take when I noticed coffee prices are up a stunning 27.8% y/y. Also near the top of the list are beef prices, up 17.7% y/y.

Gasoline prices always wreak havoc with the inflation data. They’re at it again. Even though prices at the pumps are down from last year (-7.8% y/y), they are adding more to inflation. That’s because they are falling at a smaller y/y rate. It may be too early in the morning for this, and it’s Monday, but think of first vs. second derivatives from calculus.

The good news for inflation, however, is that shelter costs continue to add less to the inflation rate. We have long argued that shelter - namely rents and mortgage interest costs - will be the Bank’s inflation friend. With interest rates now lower, and posted rents falling (in part due to the sharp increase in multi-units and now slower population growth), mortgage interest costs rose only 2.3% y/y last month and rental accommodation cost inflation eased from 5.2% to 4.7%. That’s still elevated, but we see some downward pressure as average rents paid measured by CPI catch up to now-declining asking rents. We’ll need the help from shelter, as the carbon tax removal will no longer be subtracting from annual inflation readings come April 2026 (the federal retail carbon tax was removed April 1, 2025).

Core getting a little less sticky (for now)

The Bank of Canada is keeping a close eye on ‘underlying’, or core, inflation. That’s the inflation rate that attempts to strip out the volatile swings and tease out the price pressures in the system. That’s been running inside the target range of 1-3%, but on the high end. However, two measures - CPI trim and CPI median - clocked in slightly lower at 2.8% on a year-over-year basis (down from 3% in Oct). Even more promising is that the monthly annualized change (using a 3-month moving average) in both measures fell below the 2.5% mark last month for the first time this year.

Why everything feels expensive, despite lower inflation rates

Canadians put the cost of living as one of their top concerns. As such, 2.2% overall inflation may not resonate - it seems too low for how expensive everything is. That feeling likely comes from the fact that consumer prices in Canada are 20% higher than in January 2021 (19% in Alberta), reflecting the spike in inflation in 2022 and 2023. In other words prices jumped, and are now rising at a slower rate than before, but they definitely haven’t come down.

Lower inflation in Alberta due to energy

Alberta consumer prices rose 1.9% vs November 2024, a slight increase from 1.8% in October.  After spending all of 2024 above the national inflation rate, Alberta has been trending below the Canadian average since April.

This is an energy price story. In fact, excluding energy costs, Alberta inflation is running slightly higher than Canada. Natural gas prices are falling faster in Alberta (- 28% vs -17% nationally), as are gasoline prices (-11% vs. -8%). Other items, like food, are rising slightly faster in Alberta.  

Answer to the previous trivia question: Canadian speed skater Catriona Le May Doan has three Olympic medals: two gold and one bronze.

Today’s trivia question: How many ghosts appear in A Christmas Carol by Charles Dickens?