January 19, 2026
Canada’s inflation rate ended 2025 higher than expected, but economists say the surprise increase is unlikely to prompt any immediate change in interest rate policy. While headline inflation ticked up in December, underlying price pressures continue to show signs of easing, keeping the Bank of Canada firmly on the sidelines.
Inflation Rises to 2.4% in December
According to Statistics Canada, Canada’s annual inflation rate rose to 2.4% in December, up from 2.2% in November. Economists had widely expected inflation to hold steady.
Much of the increase was tied to temporary factors rather than broad-based price pressures. StatCan said year-over-year comparisons were distorted by the federal government’s temporary GST relief introduced in December 2024, which lowered prices for certain items last year and made current prices appear higher by comparison.
Restaurant and Food Prices Drive the Headline Increase
The end of the earlier tax relief contributed to an 8.5% annual increase in restaurant meal prices, which played a key role in pushing the overall inflation rate higher.
Grocery prices also accelerated slightly. Food purchased from stores rose 5.0% year-over-year in December, compared with 4.7% in November. Some categories saw sharp increases, including:
- Coffee prices, which jumped more than 30%
- Fresh or frozen beef, up 16.8%
- Snack items previously included in the tax holiday, such as confectionery and chips
Economists noted that while food prices remain elevated, monthly trends suggest grocery inflation may be stabilizing rather than accelerating.
Energy Prices Offset Some Inflation Pressures
Helping offset food-related price increases was a sharp decline in gasoline costs. StatCan reported that gasoline prices fell 13.8% year-over-year, largely due to a global oversupply of crude oil.
This drop helped contain overall inflation and reinforced the view that December’s uptick was driven more by volatility than by renewed inflation momentum.
Transportation Costs Surprise Forecasters
One area that caught economists off guard was transportation. While airfares were slightly lower on an annual basis, prices surged 34.5% month-over-month in December, exceeding typical seasonal increases. Travel tour prices also rose, particularly for U.S. destinations.
Despite this spike, economists characterized transportation costs as volatile and unlikely to signal a lasting inflation trend.
Bank of Canada Expected to Hold Rates Steady
The December inflation report is the final set of price data ahead of the Bank of Canada’s first rate decision of 2026. The central bank held its policy rate at 2.25% in December, and markets overwhelmingly expect another hold.
As of Monday, financial markets placed the odds of a rate hold on January 28 at 84%, according to LSEG Data & Analytics.
Economists from major banks including CIBC, TD, and BMO emphasized that while the headline inflation figure surprised to the upside, core inflation measures continue to moderate, reducing the urgency for policy action.
Core Inflation Trends Remain Encouraging
TD economists noted that underlying inflation remains slightly above the central bank’s 2% target, but continues to move closer to it. Areas that previously drove inflation higher, such as rent, are showing signs of cooling.
BMO economists added that progress on core inflation alone is not sufficient to justify further rate cuts, and that meaningful economic deterioration would be required before policy easing resumes.
CIBC expects the Bank of Canada to hold rates at 2.25% for the remainder of 2026, citing mixed economic signals and persistent uncertainty.
Business and Consumer Confidence Still Fragile
The Bank of Canada’s latest business outlook survey showed that trade uncertainty and tariff concerns continued to weigh on confidence late in 2025, though sales expectations improved modestly.
Consumer surveys painted a similar picture. Canadians remain concerned about high prices and trade-related risks, although fewer respondents cited tariffs as a major inflation driver compared with earlier in the year.
Importantly, the central bank noted that tariff-related costs are no longer feeding directly into pricing decisions for most firms.
What This Signals for Interest Rates in 2026
December’s inflation increase appears driven by temporary distortions rather than renewed inflation pressure. With core measures easing, energy prices falling, and economic uncertainty lingering, the Bank of Canada has little incentive to move rates in either direction. For now, policymakers appear set to remain on hold as they wait for clearer signs of sustained disinflation or economic weakness.
References
Statistics Canada. (2026). Consumer Price Index, December 2025.
The Canadian Press. (2026). Inflation closes out 2025 with surprise uptick.
Bank of Canada. (2026). Business outlook survey and consumer expectations.
Surprise inflation hike won’t knock Bank of Canada off sidelines, economists say
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