Inflation Eases to 1.8% in December. Trump Tariffs May Force Bank of Canada to Cut Rates More Aggressively!

Canada’s annual inflation rate eased to 1.8% in December, thanks in large part to temporary tax breaks from the federal government.

Statistics Canada’s latest Consumer Price Index report found that spending on restaurants and store-bought alcohol contributed the most to the slowdown.

The federal government temporarily suspended taxes on those items in mid-December, along with children’s clothing and some toys.

Statistics Canada said that without the tax breaks, the annual inflation rate would have risen to 2.3%.

Grocery price increases also slowed from the previous month, falling to 1.9% year-on-year from 2.6% in November. Gasoline prices rose 3.5% year-on-year. Housing cost inflation eased slightly in December to 4.5%, although it remains high, while rent prices rose at a slower annual rate in December, at 7.1%.

All eyes now turn to the Bank of Canada, which is scheduled to make its next interest rate decision next week, on Wednesday, January 29.

Many economists are forecasting a rate cut of a quarter of a percentage point (0.25%), following a 0.50% cut in December.

Immediately after his inauguration, Trump again talked about imposing tariffs on Canadian goods, this time starting on February 1. The date came as a surprise after officials close to Trump, speaking anonymously, previously told reporters that the Republican president would not immediately impose tariffs, but would instead sign a memo directing federal agencies to study trade issues, including alleged unfair trade and currency practices among Canada, Mexico and China.

“It looks like we now need two forecasts: one with tariffs and one without,” said BMO chief economist Doug Porter.

“In a mild scenario where Canada faces modest or zero tariffs from the U.S., we’re looking at three rate cuts by the end of the year to 2.5 percent.”

“I think we need to revisit the entire forecast if we do end up with 25 percent tariffs. I think we’d be looking at a deeper rate cut from the Bank of Canada in that case.”