What Happened
Canada’s annual inflation rate eased to 1.8% in December, down from 1.9% in November, as a government sales tax break lowered prices on alcohol, restaurant food, and children’s clothing. Monthly consumer prices declined by 0.4%, according to Statistics Canada.
Why It’s Important
- Rate Cut Expectations: The Bank of Canada (BoC) has already cut interest rates by 175 basis points since June, and December’s inflation slowdown increases the likelihood of another 25 basis-point cut at the Jan. 29 meeting.
- Temporary Tax Relief: A tax break that took effect mid-December contributed to the lower inflation rate by reducing prices on about 10% of the Consumer Price Index (CPI) basket.
- Market Impact: The Canadian dollar weakened by 0.90% to 1.4435 against the U.S. dollar as traders bet on further monetary easing.
Key Details
- Alcohol and Restaurant Prices: Prices for alcoholic beverages fell 1.3% year-over-year in December, compared to a 1.9% rise in November, while restaurant food prices dropped 1.6% after a 3.4% increase the prior month.
- Shelter Inflation: Rent and mortgage costs rose 4.5% annually, remaining elevated despite a slight decline from the previous month.
- Gasoline Prices: Year-over-year gasoline prices rose 3.5% after falling 0.5% in November, largely due to a base-year effect.
Outlook and Market Reaction
Canada’s core inflation measures, CPI-median and CPI-trim, both edged closer to the BoC’s 2% target, further supporting expectations of a rate cut next week. CPI-median eased to 2.4%, while CPI-trim declined to 2.5%.
Analysts at CIBC Capital Markets believe underlying price pressures are stabilizing around 2%, reinforcing expectations for a 25 basis-point rate reduction. However, BoC Governor Tiff Macklem has signaled that further cuts will be gradual.