Inflation continued to cooperate last month, with an assist from the GST holiday break.

The overall inflation rate* in Canada eased to 1.8% (from 1.9%) in December, staying below the Bank of Canada’s 2% target, and in line with the consensus expectations.

Inflation has held in the Bank’s 1-3% control range for 12 straight months, and has remained much softer than the readings south of the border.

The friendly inflation reading was aided by the GST holiday, which put downward pressure on the prices for a range of goods and services (e.g. food, alcohol, clothing, recreation). The impact is temporary, and the reinstatement of the tax will push inflation higher in February and March. The Bank of Canada has said it will see through the transitory effects of these measures. 

This report is expected to keep the Bank of Canada in easing mode. The Bank has already signalled that jumbo cuts are likely done in this cycle, and nothing in today’s report should change this view. Under our base case, we see three more 25 basis-point cuts, bringing the policy rate to 2.5% by summer. With inflation at target and tariff threats posing downside economic risk, we look for a cut next week.

National details:

Gasoline adds fuel to inflation - The pullback in headline inflation came despite an acceleration in gasoline prices (up 3.5% above year-ago levels).

Stickier ‘trend’ readings  - Core measures of inflation, which attempt to capture underlying trends, ticked down slightly on an annual basis. The two key indicators—median and trim—rose by 2.4% and 2.5% year-over-year (y/y), respectively. However, the three-month measures** accelerated to the mid 3s, which may raise some eyebrows at the Bank.

Shelter adding less - Shelter is still a major inflation culprit, but its effect is diminishing. In December shelter costs rose 4.5% y/y—the lowest since June 2021. Mortgage interest costs were up 11.7% y/y, down from the peak of 31% in the summer of 2023. This measure is heavily influenced by monetary policy, and will continue to ease as the Bank cuts. Excluding mortgage interest costs, consumer prices rose only 1.3% y/y.

Food also adds less, but remains expensive - Food is not the same inflation driver as it was, though prices remain high. Grocery prices rose 1.9% y/y last month. While that’s a cooldown from 2.6% in November, grocery prices are up 24% since January 2021.

Alberta inflation declines, but holds above national rate

Alberta’s annual inflation rate also fell last month, moving from 2.8% to 2.5%, though it remained higher than the national average. 

Owned accommodation (including mortgage insurance) costs rose faster in Alberta, while rent increases moderated in line with national average.  

Statistics Canada noted that the provinces with an HST saw a larger impact from the tax holiday on inflation than others. With no PST or HST in Alberta, consumers would have only seen the GST reduction on select items. 

Alberta gasoline prices were higher than a year ago (+14.4%), compared to a smaller national increase (+3.5%), in part due to the reinstatement of the fuel tax following a pause in 2023 and much of 2022. This relief measure had a temporary effect on inflation, lowering readings in 2022-2023 and raising them in 2024. The effect will dissipate next month, as the majority of the gasoline tax was back in place in January 2024.

Alberta finished the year with a 2.9% average annual inflation rate in 2024, surpassing the 2.4% national increase. A tighter housing market was a major contributor, with shelter costs rising at a faster rate in Alberta. Energy costs also rose at a faster rate in Alberta. This is a reversal of the previous three years when consumer prices were rising faster nationally.  Our base case forecast for 2025 is for Alberta’s inflation rate to moderate to 2.2% though there is a risk of prices escalating under a full trade war scenario

*The inflation rate is the year-over-year percent change in the unadjusted monthly Consumer Price Index.

**Month-over-month changes in the 3-month moving average, annualized.

Answer to the previous trivia question: Athabasca University achieved self-governing status as a public university on April 12, 1978.

Today’s trivia question: In what year did artificial intelligence pioneer Alan Turing give a public lecture in which he said “what we want is a machine that can learn from experience?”