Headline CPI inflation ticked up slightly to 2.4% year-on-year (y/y) in December, slightly above consensus expectations. The acceleration was driven by the comparison to lower prices during the federal government’s temporary sales tax holiday a year earlier.
The temporary GST/HST exemption in December 2024 applied to spending on restaurant food, alcoholic beverages, toys, games and hobby supplies, children’s clothing and some grocery items, such as potato chips and confectionery.
Not surprisingly, the biggest lift to headline CPI came from restaurant meals (+5.8 y/y), which were exempt from sales taxes the year prior. Prices at grocery stores were flat on the month, but up 5.0% y/y due to hefty increases for beef and coffee.
There was some offset from prices at the pump, where prices were down 13.8% from a year ago in December.
Service inflation rose to 3.3% y/y in December, likely boosted by restaurant meals, but shelter inflation continued to cool (2.1% y/y). Prices for owned accommodation are up only 1.3% y/y – the slowest pace in 12 years. This has been helped both by smaller increases in mortgage interest costs (+1.7% y/y) and falling homeowners’ replacement costs (-1.6% y/y).
The Bank of Canada has focused on broader “underlying inflation” recently, but the official core inflation metrics (median and trim), both cooled further in December, running at 2.6% y/y on average. Zeroing in on trends over the past three months, trim and median inflation were running at only 1.5% and 1.9% (annualized), now below the Bank of Canada’s 2% target.
Key Implications
Headline inflation in December’s was boosted by comparisons to last year’s GST holiday, but zeroing in on core measures shows inflation in Canada has cooled. Underlying inflation is still above the 2% target on a year-on-year basis, but it is getting a lot closer in recent months.
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.
