Core inflation keeps cooling even as December’s headline rate ticks up, leaving most economists expecting the Bank of Canada to hold its policy rate through 2026
Headline inflation just surprised to the upside – and most Bay Street economists still do not see a reason for the Bank of Canada to move off its 2.25 percent policy rate any time soon.
According to Statistics Canada, the annual inflation rate rose to 2.4 percent in December from 2.2 percent in November.
Reuters said the consumer price index fell 0.2 percent month over month, a smaller decline than markets had forecast.
Beneath the headline, core measures continued to cool.
CPI‑median eased to 2.5 percent from 2.8 percent and CPI‑trim slowed to 2.7 percent from 2.9 percent in November.
Bloomberg added that the average of the Bank of Canada’s trim and median gauges decelerated to 2.6 percent year over year and dropped to 1.7 percent on a three‑month moving annualised basis.
Most of the upside surprise came from a base effect.
Statistics Canada said a temporary federal GST holiday that began in mid‑December 2024 and ran for two months lowered prices for dining out, alcohol, children’s toys and other goods at the time, so its removal from the year‑over‑year comparison pushed inflation higher in December 2025.
Bloomberg noted that restaurant prices, which benefited from the tax break a year earlier, rose 8.5 percent on the year – the largest increase since 1991, when the GST was first implemented – and were the biggest contributor to the acceleration in inflation.
Food inflation remains a clear pressure point.
Statistics Canada said grocery prices rose 5 percent year over year in December, up from 4.7 percent in November, with coffee up more than 30 percent and fresh or frozen beef up 16.8 percent.
Some snack items, including potato chips and confectionery, also saw sharp annual gains after being included in the earlier tax holiday.
According to the Financial Post, RBC assistant chief economist Nathan Janzen warned that “the rise in food prices will continue to raise concerns about affordability, particularly at the lower end of the income distribution.”
However, he said “there is little the Bank of Canada can do about higher grocery prices,” which he linked to “global commodity price trends” and “reduced cattle inventories” that are pushing up meat prices.
CIBC senior economist Andrew Grantham told BNN Bloomberg that the GST holiday was the main driver of December’s food inflation and that January will see further volatility as the full month of the 2024 tax break drops out of the comparison.
He said “the federal tax relief was only partially responsible for grocery inflation in December,” but noted that prices appeared stable after November’s jump.
He added that “we’re certainly not seeing any reprieve in terms of grocery prices for Canadians, who are paying still a lot more than they were two or three years ago.”
Energy worked in the opposite direction.
Statistics Canada said gasoline prices fell 13.8 percent year over year in December after a 7.8 percent decline in November, citing a global oversupply of crude oil, according to Reuters.
For policy, markets and economists focused on the signal from core inflation.
The Bank of Canada’s preferred measures have now cooled for three straight months.
In a note cited by Reuters, Grantham said that “despite a somewhat stronger than expected headline reading, today’s data are still consistent with underlying inflation being close to 2 percent.”
He added that he expects no change in the Bank of Canada’s overnight rate throughout 2026.
BNN Bloomberg reported that CIBC expects the policy rate to remain at 2.25 percent for the rest of 2026.
Grantham told BNN Bloomberg that “it was a little bit of a surprise when that number flashed up on the screens, but the more you dig into it, the less concerning it was” despite the acceleration and upside surprise.
He added that “we really need (monetary) policy below a neutral rate, or at least to the bottom of that neutral range, to help us through this period of uncertainty,” and said “today’s inflation numbers don’t change that picture.”
BMO chief economist Doug Porter told CBC News that “perhaps the main takeaway here is that after a year of some wide divergences, almost all of the main measures of inflation are now very close to [2.5 percent].”
He said this is in line with the Bank of Canada’s view on the pace of underlying inflation.
He wrote in a note reported by The Canadian Press that “while the headline rate was above expected, the details were somewhat softer, and the Bank will likely be encouraged by the pullback in most core [inflation] measures.”
However, he cautioned that “there certainly is not enough here to push the BoC toward more cuts.”
It would take a serious deterioration in the economy and some further signs of core inflation decelerating to again open the door for renewed policy easing — we’re simply not there yet.”
TD Economics senior economist Leslie Preston said underlying inflation appears to be holding above 2 percent, “but it is getting a lot closer in recent months.”
She argued that “headline inflation in December was boosted by comparisons to last year’s GST holiday,” but that focusing on core measures shows inflation in Canada has cooled, according to the Financial Post.
She added that “overall, December’s data is consistent with our expectation for inflation to moderate to the bank’s target over the next year ... as past inflation problem areas, like rents, continue to cool.”
Servus Credit Union chief economist Charles St‑Arnaud told BNN Bloomberg that “I don’t see anything in the report today that would change my view on the Bank of Canada,” adding that the central bank is “happy with where rates stand at the moment.”
In a note reported by the Financial Post, he wrote that “there is nothing in today’s report to be of immediate concern for the Bank of Canada that could influence monetary policy in the short term.”
He said he still expects the BoC to keep its policy rate unchanged at 2.25 percent “for an extended period.”
Other forecasters echoed that steady‑hand view.
The Financial Post, Desjardins managing director and head of macro strategy Royce Mendes said “we continue to believe that inflationary pressures are tame enough for the Bank of Canada to place less weight on the upside risks to consumer prices.”
He added that the economy has “held up well enough for central bankers to remain on the sidelines.”
BMO senior economist Shelly Kaushik said in a note reported by The Canadian Press that forecasters at the bank still see the policy rate holding steady through 2026, but that “risks are skewed to further easing if sour sentiment drives a weaker growth outlook and inflation slows.”
Fitch Ratings economist Jessica Hinds said Monday’s numbers were “highly unlikely to change the calculus” for the Bank of Canada, according to Reuters.
