Consumer prices in Canada increased at a faster pace than expected in December, with inflation rising to 2.4% year over year. The acceleration was largely driven by a base effect linked to last year’s temporary sales tax break, according to data released on Monday. Despite the stronger headline figure, key core inflation indicators continued to ease for a third straight month.
Economists surveyed by Reuters had expected inflation to remain unchanged at 2.2%, the same level recorded in November.
On a monthly basis, Canada’s consumer price index (CPI) fell by 0.2%, according to Statistics Canada. While prices declined, the drop was slightly smaller than market expectations, which had pointed to a 0.3% decrease.
The Bank of Canada’s preferred core inflation gauges, CPI-median and CPI-trim, continued their downward trend and reached their lowest levels since December 2024. CPI-median slowed to 2.5%, down from 2.8% in November, while CPI-trim eased to 2.7% from 2.9%. These measures are closely monitored as they strip out volatile price movements and provide a clearer view of underlying inflation pressures.
The cooling in core inflation supports expectations that the Bank of Canada will keep interest rates unchanged, economists said following the release. Financial markets are currently pricing in no rate changes throughout the year.
The Canadian dollar strengthened after the data, trading 0.3% higher at 1.3880 per U.S. dollar, or 72.05 U.S. cents, as the U.S. dollar weakened broadly.
The Bank of Canada held its benchmark policy rate at 2.25% in December, noting that this level remains appropriate for keeping inflation close to its 2% target.
Despite the higher headline reading, analysts remain confident in the inflation outlook. Andrew Grantham, senior economist at CIBC Capital Markets, said the data are consistent with inflation remaining near target, adding that his team expects no changes to the overnight rate through 2026.
Jessica Hinds, a director on the economics team at Fitch Ratings, also said the report is unlikely to alter the central bank’s policy stance.
The December increase in headline inflation was largely attributed to the absence of a temporary sales tax break that had been in place during December 2024. That measure, introduced by the previous Liberal government under Justin Trudeau, applied to select food items and children’s products.
Restaurant prices, which were affected by the tax holiday last year, were the largest contributor to the acceleration in annual inflation in December 2025.
Offsetting some of the upward pressure, gasoline prices declined 13.8% year over year in December, following a 7.8% drop in November.
Excluding volatile food and energy components, inflation rose 2.5% during the month. Meanwhile, services inflation accelerated to 3.3%, up from 2.8% in November, while goods prices increased by 1.2%, slowing from a 1.5% rise in the prior month.
On an annual average basis, consumer prices rose 2.1% last year, following a 2.4% increase in 2024.
