Surprise inflation hike won’t knock Bank of Canada off sidelines, economists say

Charles St-Arnaud, chief economist and former BoC economist at Servus Credit Union, joins BNN Bloomberg to react and discuss to the latest Canadian CPI data.

Inflation closed out 2025 with a surprise uptick, but economists weighing in Monday argued there was little cause for concern under the hood to warrant a change in interest rates from the Bank of Canada later this month.

The annual pace of inflation rose to 2.4 per cent in December, Statistics Canada said Monday in reporting the consumer price index.

A poll of economists heading into the data release had expected the annual inflation rate would hold steady at 2.2 per cent.

StatCan said the rebound from the federal government’s temporary tax holiday was chiefly responsible for the acceleration.

The agency said Ottawa’s move to take GST off some items for two months starting mid-December in 2024 dropped prices for dining out, alcohol, children’s toys and more a year earlier, so the year-over-year comparison pushed the consumer price index higher.

That led to an 8.5 per cent annual increase in the price of restaurant meals, which StatCan said fuelled the acceleration in the headline number.

Andrew Grantham, senior economist at CIBC, said the tax holiday was the main driver of food inflation in December. He added that January will see that volatility continue with a full month of the federal tax break falling out of the annual comparisons.

The price of food bought from the grocery store rose five per cent annually in December, up from 4.7 per cent in November. StatCan said the price of coffee was up more than 30 per cent in December, while the cost of fresh or frozen beef rose 16.8 per cent.

Some grocery items including potato chips and confectionary goods were also included in the tax holiday and saw annual price jumps in December, the agency said.

Grantham said the federal tax relief was only partially responsible for grocery inflation in December, but he noted those prices were stable after a hike recorded in November.

“It does seem as if we’re levelling off there, but we’re certainly not seeing any reprieve in terms of grocery prices for Canadians, who are paying still a lot more than they were two or three years ago,” he said.

Offsetting December’s inflation hike was a 13.8 per cent drop in the cost of gasoline, StatCan said. The agency pointed to an oversupply of crude oil globally that drove down prices.

Grantham said while the distortion from the tax holiday was expected, what caught forecasters off guard was the jump in transportation costs last month.

The cost of air transportation was marginally lower year-over-year, but StatCan said airfare prices surged 34.5 per cent month-over-month – outpacing the previous year’s holiday price hike. The cost of travel tours also rose on a monthly basis, which StatCan attributed to higher prices for U.S. destinations.

The December inflation figures are the Bank of Canada’s last look at price data before it makes its first interest rate decision of the year next week. The central bank held its benchmark interest rate steady at 2.25 per cent in December.

Financial market odds for a rate hold on Jan. 28 stood at 84 per cent as of Monday afternoon, according to LSEG Data & Analytics.

Grantham said that while the acceleration in headline inflation was unexpected, signs within the report that key core inflation metrics were moderating meant there was little cause for alarm.

“It was a little bit of a surprise when that number flashed up on the screens, but the more you dig into it, the less concerning it was that we saw that acceleration and that slight upside surprise today,” he said.

Leslie Preston, senior economist at TD Bank, said in a note to clients Monday that underlying inflation appears to be holding above the central bank’s two per cent target, “but it is getting a lot closer in recent months.”

“Overall, December’s data is consistent with our expectation for inflation to moderate to the bank’s target over the next year ... as past inflation problem areas, like rents, continue to cool,” Preston said.

BMO chief economist Doug Porter said in a note that progress on the core inflation front would not be enough to warrant additional rate cuts from the Bank of Canada.

“It would take a serious deterioration in the economy and some further signs of core inflation decelerating to again open the door for renewed policy easing — we’re simply not there yet,” he said.

Grantham said December’s inflation jump appeared to be caused by a couple of volatile elements, and signs of weakness elsewhere in the economy suggest the Bank of Canada needs to neither lower nor hike its benchmark interest rate.

CIBC sees the central bank holding rates at 2.25 per cent for the remainder of 2026.

“We really need (monetary) policy below a neutral rate, or at least to the bottom of that neutral range, to help us through this period of uncertainty. And today’s inflation numbers don’t change that picture,” Grantham said.

The Bank of Canada’s fourth quarter business outlook survey, also released Monday, showed trade-related uncertainty and the broad economic effects of tariffs continued to weigh on confidence in the final quarter of 2025.

Firms largely reported rosier sales outlooks than earlier in the year when fears over tariffs were more pronounced, however.

The central bank’s separate survey of consumers suggested high prices and trade uncertainty continue to hound Canadians.

Consumers most frequently pointed to tariffs as the factor they believe is affecting inflation, though trade impacts were cited less often than in the third quarter surveys.

The Bank of Canada, meanwhile, said the pass-through from tariff-related costs is no longer putting upward pressure on firms’ pricing decisions.

BMO senior economist Shelly Kaushik said in a note after the surveys were published that while forecasters at the bank still see the policy rate holding steady through 2026, “risks are skewed to further easing if sour sentiment drives a weaker growth outlook and inflation slows.”

Craig Lord, The Canadian Press

This report by The Canadian Press was first published Jan. 19, 2026.