Inflation Rate Slows To 1.8% In December

To understand where the CPI is today, here’s a look at the year-over-year percentage changes since it hit a 39-year high of 8.1% in June 2022:

Inflation remains within the BoC’s 2% target window. So how does this latest report affect what’s left in our bank accounts at the end of the month? Let’s look at what’s happening with the three biggest contributors to Canada’s inflation rate: shelter, transportation and food.

Shelter is the most important component of the CPI, representing 30% of its inflation basket. The index covers both rental and owned accommodations. Rental costs track the amount paid by a tenant month-over-month. In contrast, owned accommodation costs track several components, including mortgage interest rate costs, property taxes, home and mortgage insurance, and maintenance and repairs.  

Historically, higher costs for mortgages and rent have put sustained upward pressure on inflation and still keep headline inflation elevated. According to this latest release, however, shelter price growth continued to ease in December, rising 4.5% year-over-year in December, compared to 4.6% in November,  4.8% in October and 5.0% in September. 

“Closely watched shelter inflation continues to slowly come down the mountain, with rents easing to 7.1% (versus an average rise of 8.2% in 2024) and mortgage interest costs stepping down to 11.7% (averaged a 20% rise last year). Excluding shelter, inflation dipped to just 0.7% year-over-year,” noted Douglas Porter, chief economist and managing director with BMO Economics.

Rent cooled slightly year-over-year in December, up 7.1% compared with 7.7% the month before. However, according to StatCan, rent prices have increased 22.1% since December 2021.

Mortgage interest costs (MIC) decelerated for the 16th consecutive month (following a 30.9% peak in August 2023), slowing to 11.7% in December, compared to 13.2% in November and 14.7% the previous month.

“Growth in mortgage interest costs continued to slow as earlier declines in interest rates continue to filter through household effective borrowing costs, but still account for a disproportionate share of total year-over-year CPI growth ( approximately 30% as of December),” notes Nathan Janzen and Abbey Xu, economists with RBC.

Gasoline prices rose 3.5% in December compared to a 0.5% decline in November, largely due to a base-year effect as prices fell 4.4% month-over-month in December 2023. On a monthly basis, gas prices fell 0.6% in December 2024.

Here’s how the year-over-year gasoline prices have tracked over the past 10 months:

December 2024: +3.5%
November 2024: -0.5%
October 2024: -4.0%
September 2024: -10.7%
August 2024: -5.1%
July 2024: +1.9%
June 2024: +0.4%
May 2024: +5.6%
April 2024: +6.1%
March 2024: +4.5%

Gas prices are up 12.6 cents from last year’s average of 141.7. cents per litre, according to price tracker GasBuddy.com, with Canadians paying an average of 154.3 cents per litre. The average price at the pump is up 3.8 cents from last month’s average of 150.6 cents per litre.

“Food purchased from restaurants contributed the most to the deceleration, leading [headline] food CPI inflation to slow to 0.6% from 2.8% in November,” noted Desjardins’ Bartlett. 

Thanks to the GST.HST break, Canadians paid less for food purchased from restaurants in December (-1.6%) and 4.5% less compared to November.  “Restaurant prices fell year-over-year for the first time in data going back to the 1960s,” noted RBC’s Janzen and Xu.

Alcohol was down 4.1% month-over-month (three times higher than the previous largest monthly drop of 1.4% in December 2005) and down 1.3% year-over-year in December, compared to a 1.9% increase in November.

“Even grocery prices overall caught a bit of a break (with some store items normally taxed), which helped cut the yearly rate to 1.9% from 2.6%,” noted BMO’s Porter. “But, looking through the tax cut, underlying inflation just went from 1.7% to 2.2% (i.e., excluding indirect (or sales) taxes).”

The BoC has an inflation target of 2%, with inflation measured as the 12-month rate of change in the consumer price index. The Bank uses this indicator to influence short-term interest rates by adjusting its target for the overnight rate on eight fixed dates each year. Commercial banks, in turn, use the overnight rate to set their prime rate. As the inflation figure trends upwards, the Bank raises rates to cool an overheated economy. 

Between April 2022 and June 2024, the BoC hiked its overnight rate 10 times by 475 basis points to a 22-year high of 5%. Interest rate changes affect the economy in four primary channels:

• Commercial interest rates, namely what you pay on mortgages and loans and what you receive on deposits, such as high-interest savings accounts 
• The Canadian dollar exchange rate
• Canadians’ expectations for inflation
• The price of assets such as houses, stocks and bonds

However, in June 2024, the BoC cut its key interest rate by 25 basis points to 4.75%, its first rate cut in over four years and then again in July by another 25 basis points to 4.50%. Canada’s central bank cut rates by another 25 basis points in September to 4.25% and then by 50 basis points in October and December, to land at 3.255%.  Most recently, the BoC cut rates by 25 basis points to 3%.

While analysts widely expect more rate cuts in 2025, most agree it will happen more gradually. However, the threat of U.S. tariffs on Canadian imports creates significant uncertainty around the timing and depth of these cuts.

December’s’s print was once again good news for Canada on the inflation front. Here’s what some analysts are saying:

Randall Bartlett, Senior Director of Canadian Economics, Desjardins: “While the further deceleration in headline CPI inflation was a positive in December, this is muddied by the GST/HST holiday that started in the month. January and February CPI readings will be similarly distorted. Indeed, the drag from lower sales taxes will offset some of the base effects that were expected to push inflation materially higher in Q1 2025, thereby keeping inflation at the start of the year close to the Bank’s 2% target. At the same time that inflation is coming in around the Bank’s target, we’re tracking Q4 real GDP growth above the BoC’s latest forecast of 2% annualized, suggesting all is relatively well on the home front. But with the inauguration of President Donald Trump yesterday, downside risks to the economy abound, not least from the threat of a 25% tariff being introduced on February 1. This economic uncertainty reinforces our call that the next rate cut in January is likely to be a modest 25 basis points, and that subsequent rate reductions should be of a similar magnitude.” 

Douglas Porter, Chief Economist and Managing Director Economics, BMO: “The headline dip in inflation was clearly flattered by the GST holiday, which will help again in next month’s reading for January…but then reverse over the next two months. And the news on core also wasn’t exactly friendly, with the three-month trend in the two major measures forging back above 3%. Even so, we believe that the heavy overhang of trade uncertainty—possible U.S. tariffs—overrides almost all else. As a result, we suspect that today’s reading is just good enough to allow the Bank of Canada to trim next week, for risk management purposes.”

Leslie Preston, Managing Director and Senior Economics, TD: “December’s inflation data came in line with the Bank of Canada’s expectations for inflation to average close to 2%. Despite the tax-cut driven dip in headline inflation, core inflation pressures have picked up over the past three months, suggesting that inflation readings are likely to move up a bit in the months ahead. This will give the Bank of Canada reason to adopt a more gradual pace of interest rate cuts this year. We expect a quarter-point cut at every other decision in 2025.” 

Andrew Grantham, Senior Economist, CIBC Capital Markets:  “Canada’s inflation data is only going to get harder to dissect in January, with the full month impact from the GST/HST tax break taking hold. Any news on the tariff front will also muddy the picture for inflation ahead. However, through the volatility it still appears that core price pressures are low enough, and the economy weak enough, to justify a 25 basis point reduction in interest rates from the Bank of Canada next week.”

Matthieu Arseneau, Deputy Chief Economist, and Ethan Currie, Analyst, National Bank of Canada: “ We believe that the Bank of Canada should continue to ease monetary policy by cutting its policy rate by 25 basis points next week. This would give us a little more hope of seeing economic growth above potential assuming Canada is able to avoid a tariff war with our largest trading partner.””

The next CPI inflation rate announcement with the numbers for January is on February 18, 2025.

The last time the CPI was under the Bank of Canada’s 2% inflation target was in February 2021 when it came in at 1.1%. Since then, it has been on a wild ride, jumping to 2.2% in March 2021 and 8.1% in June 2022. However, we can see just how precipitous the last few years have been when we take a broader look at the 10-year history of the CPI year-over-year percentage changes.

For a longer-term perspective, here’s how the CPI has changed since 1995: