In December 2025, Canada experienced an unexpected inflation increase, according to Statistics Canada. The annual inflation rate rose to 2.4%, surpassing economists’ expectations of 2.2%. This surge primarily resulted from the previous year’s temporary GST tax holiday, which had a significant impact on various consumer items.
Key Factors Influencing Inflation
The temporary removal of the Goods and Services Tax (GST) on specific goods and services in mid-December 2024 contributed to the rise in the consumer price index. As a result, the price of restaurant meals jumped by 8.5% annually. Moreover, the price of food from grocery stores rose by 5% in December, a slight increase from 4.7% in November.
Specific Price Changes
Several notable changes in food prices emerged:
- Coffee prices surged by over 30% in December.
- Fresh or frozen beef experienced a 16.8% price increase.
- Some grocery items benefiting from the tax holiday, such as potato chips, also registered annual price hikes.
Despite the overall increase in inflation, the cost of gasoline markedly declined by 13.8%, attributed to an oversupply of crude oil globally.
Transportation Costs and Expectations
Transportation costs saw some volatility, with airfare prices climbing by 34.5% month-over-month, outpacing previous year’s holiday hikes. Additionally, the costs for travel tours increased due to higher expenses for U.S. destinations.
Bank of Canada’s Interest Rate Response
The Bank of Canada is set to make an interest rate decision shortly, having held the rate steady at 2.25% in December. Financial markets predict an 84% likelihood that rates will remain unchanged on January 28.
Outlook and Economic Conditions
According to economists, while the inflation spike was unexpected, the underlying metrics suggest limited cause for immediate concern. Economic analysts, including Andrew Grantham and Leslie Preston, pointed out that core inflation appears to be stabilizing, moving closer to the bank’s 2% target.
- Grantham stated, “Signs of weakness in the economy suggest no need for rate changes.”
- Preston noted that rental inflation is cooling.
Doug Porter, chief economist at BMO, indicated that significant negative economic shifts would be necessary for the Bank of Canada to consider more aggressive rate cuts. The current economic landscape indicates a steady path for monetary policy throughout 2026.
Consumer Sentiment and Economic Outlook
The Bank of Canada’s business outlook survey highlighted persistent trade uncertainties, particularly regarding tariffs. Firms reported improved sales expectations compared to earlier in the year, despite ongoing inflation concerns related to high prices and tariff implications. The surveys revealed that while consumers acknowledged tariffs as a factor influencing inflation, their impact was less significant than before.
In summary, economists assert that despite the December inflation surge, there is insufficient evidence to prompt changes in interest rates from the Bank of Canada in the near term. The focus will remain on core inflation trends and overall economic conditions as the situation progresses.
