As inflation ticks lower to 1.8% in December, economists expect further BoC rate cuts

OTTAWA — Canada’s annual inflation rate ticked lower in December, thanks in part to Ottawa’s temporary GST tax break, but economists still see interest rate cuts on the horizon as potential tariffs loom.

Statistics Canada said Tuesday the annual inflation reading for December came in at 1.8 per cent, down from 1.9 per cent in November.

The report noted restaurant food purchases and alcohol bought from stores contributed the most to the deceleration — items which were subject to the tax reprieve, along with children’s clothes and toys, among others.

Without the tax break, the agency said the annual inflation rate would have risen to 2.3 per cent, driven in part by upward pressure from a month-over-month jump in accommodation costs in British Columbia — coinciding with Taylor Swift wrapping up her Eras Tour in Vancouver in early December.

“Looking beyond the tax cut, it was not a great report, frankly, from the inflation standpoint,” BMO chief economist Doug Porter said.

“December is a tricky month because typically you get discounting around Boxing Day sales, and there might be some carryover from Black Friday sales.”

Statistics Canada noted prices included in its consumer price index are final prices, including all excise and other taxes.

With the federal tax break set to last until Feb. 15, the impact of the measure will likely continue to show through in the January and February inflation reports.

“As the tax break came into affect mid-month, a further impact is expected to be seen in January when prices during the full month were subject to the lower rate,” CIBC senior economist Andrew Grantham said in a note.

Growth in grocery prices also decelerated from November to 1.9 per cent year-over-year, from 2.6 per cent.

Gas prices rose 3.5 per cent year-over-year, in part because what’s know as the “base-year effect” in which prices declined 4.4 per cent in December 2023.

Shelter cost inflation ticked down slightly in December to 4.5 per cent, though remains elevated, while rent prices rose at a slower pace year-over-year in December, at 7.1 per cent.

Attention now turns to the Bank of Canada, which is set to make an interest rate decision next week.

Many economists have called for another quarter-percentage point rate cut, following a half-point cut in December. Porter said weighing on the central bank’s decision will be the threat of 25 per cent tariffs from U.S. President Donald Trump.

The president mused on Monday night about hitting Canada with tariffs on Feb. 1.

The date comes after Trump officials, speaking anonymously, suggested to reporters that the Republican president would only sign a memorandum telling federal agencies to study trade issues, including alleged unfair trade and currency practices by Canada, Mexico and China.

“It’s almost like we need two forecasts: one with tariffs and one without,” Porter said.

“In the mild scenario where Canada is affected by modest or no tariffs from the U.S., we were assuming three rate cuts through the rest of the year, taking the overnight rate down to 2.5 per cent.

“I think we have to revisit the entire forecast if we are indeed subject to 25 per cent tariffs. I think we would be looking at deeper cuts by the Bank of Canada.”

TD Economics reiterated its expectation of a quarter-percentage point cut at “every other (rate) decision in 2025.”

Meanwhile, Derek Holt, head of capital markets economics at Scotiabank, said he thinks the Bank of Canada should keep its policy interest rate on hold next week, considering consumption has rebounded on a per-capita basis and the threat of tariffs.

“All signs point to strong Canadian retaliation that would add to underlying price pressures,” Holt wrote in his take on the CPI report.

“What’s the rush to cut after 175 basis-points of cuts to date? I know one thing for sure: I wouldn’t cut at this point while leaving all options open going forward.”

This report by The Canadian Press was first published Jan. 21, 2025.

Nick Murray, The Canadian Press