Headline CPI inflation fell a tenth to 1.8% year-on-year (y/y) in December, pushed lower by the temporary GST/HST break that went into effect mid-month.
Approximately 10% of the All-items CPI basket was affected by the tax exemption. Main price impacts were seen in food purchased from restaurants (-1.6% y/y), booze (-1.3% y/y), toys, games, and hobby supplies (-7.2% y/y) and children’s clothing (-10.6% y/y).
Shelter inflation has been a key challenge for Canadians for some time now and cooled further in December to 4.5% y/y. Rent inflation cooled slightly to 7.1% y/y from 7.7% y/y in November, and the lift from higher mortgage interest costs continued to wane (to 11.7% y/y).
For Canadians looking to escape the cold, inflation for travel-related items rose in December. Travel services prices were up 7.9% y/y, and tours rose 5.7% y/y. Even gassing up for a road trip would cost you 3.5% more relative to a year ago. The impact of Taylor Swift’s Eras Tour could be seen in accommodation prices in B.C., which were up 13.6% y/y, driven by the largest month-on-month increase in the series ever (+62% m/m).
The Bank of Canada’s preferred “core” inflation measures were down slightly at 2.5% y/y on average, down from 2.6% in November.
Key Implications
December’s inflation data came in line with the Bank of Canada’s expectations for inflation to average close to 2%. Despite the tax cut driven dip in headline inflation, core inflation pressures have picked up over the past three months, suggesting that inflation readings are likely to move up a bit in the months ahead. This will give the Bank of Canada reason to adopt a more gradual pace of interest rate cuts this year. We expect a quarter point cut at every other decision in 2025.
Tariffs on Canadian exports didn’t come on day one of the new administration, but President Trump does plan to establish an “External Revenue Agency” largely to collect tariffs, and Trump reiterated threats of a 25% tariff on Canada and Mexico, now due on Feb 1st. This creates a very challenging backdrop for Canada’s economy, and we expect the BoC to cut rates a quarter point next week, which would put interest rates further into “neutral” territory – a stance we think is warranted given relatively soft demand backdrop for Canada’s economy.
