Canada’s inflation rate ticked down in December, but one expert says the Bank of Canada will look past the headline number and examine the risks posed by underlying price pressures ahead of its next interest rate decision.
Statistics Canada’s consumer price index (CPI) reading for last month was 1.8 per cent, the agency said on Tuesday, down slightly from the 1.9 per cent clocked in November.
The easing was due in large part to the temporary tax break implemented by the federal government in early December, StatCan said, which made items such as restaurant meals, alcohol and children’s toys more affordable for Canadians.
“It’s clear that the GST holiday had a big impact on headline inflation,” Charles St-Arnaud, chief economist with Alberta Central and former economist with the Bank of Canada, told BNN Bloomberg in a Tuesday interview.
“But when we look at measures excluding taxes, it’s actually increasing; it actually accelerated to 2.2 per cent, slightly higher. So, it’s clear that without the tax holiday, inflation would have accelerated in the country.”
Tuesday’s inflation data comes one week before the Bank of Canada is set to make its first interest rate decision of the year. Many economists expect the central bank to continue its easing cycle with a quarter-point cut.
St-Arnaud said that in the coming days, the bank will be weighing how its decision could impact both the inflation picture and the broader Canadian economy, which may soon be caught in the middle of a trade war with the U.S.
“Under the hood we look at what we call the momentum to the change in prices over the past three months… when you look at the core section, we’re again above three per cent, so that could start to ring some alarm bells for the Bank of Canada,” he said.
“On the flip side, when we look at what has been their main focus in recent months, it’s really the concern on the downside risk to growth. We know growth is going to decelerate in 2025… and we also have the threats from the tariffs which will most likely be a drag on the economy.”
After his inauguration on Monday, U.S. President Donald Trump once again threatened Canada and Mexico with 25 per cent tariffs on exported goods entering the U.S., setting Feb. 1 as a possible start date.
“So, it’s how (the Bank of Canada) balances that,” St-Arnaud said, adding that the bank is likely more worried about stimulating an economy under threat rather than pivoting back to the inflation fight by holding or cutting its key rate.
“They’re probably saying: ‘Let’s provide some stimulus to prevent the downside risk from happening, or at least soften some of that downside risk.’”