Statistics Canada reported that Canada’s inflation rate slowed in December, marking its second straight month under the Bank of Canada’s (BoC) 2% target. The decline was helped by the federal government’s sales tax break, which was implemented to bring down the total costs of many essential goods around the holidays. While inflation has slowed, the BoC is likely to keep lowering interest rates, but potentially at a more gradual pace in 2025.

• Canada’s annual inflation rate was 1.8% in December, down from the 1.9% rate in the previous month. This marked Canada’s lowest inflation rate since September, benefiting from the sales tax break. It was estimated that inflation might have moved above the BoC’s 2% target without the tax break. On a monthly basis, consumer prices fell by 0.4%.
• The annual growth in prices slowed for shelter and food in December over November. Within the food category, the tax break dropped the total spent at restaurants. Conversely, prices for gasoline picked up in December, rising by 3.5%.
• Key measures of core inflation, which excludes volatile items such as energy and food, edged lower in December. Still, core inflation remained above the BoC’s 2% target, suggesting Canada’s central bank has room to further lower interest rates.
• US President Donald Trump was sworn in on Monday and reiterated his desire for a broad-based 25% tariff on Canadian imports into the US. This could come at the beginning of February. Tariffs have weighed on the outlook for Canada’s economic health.

Data is pointing to more rate cuts from the BoC this year, perhaps as early as its January meeting. The BoC looks poised to take a more gradual approach. However, tariffs, and their impact on Canada’s economy, hang in the balance and could affect the BoC’s path of monetary easing. The BoC’s next interest-rate decision is on January 29.

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