Economists: Inflation Surge Won’t Prompt Bank of Canada Action

Recent data from Statistics Canada indicates an unexpected rise in inflation, which reached 2.4% in December 2025. This increase has prompted discussions among economists about the Bank of Canada’s potential response, particularly concerning interest rates. As inflation statistics continue to be evaluated, experts assert that immediate action from the central bank is unlikely.

Inflation Trends and Drivers

According to the latest consumer price index (CPI) report, the annual inflation rate rose from a projected 2.2% to 2.4%. Economists attribute this shift mainly to the expiration of a temporary tax holiday on the Goods and Services Tax (GST) implemented by the Canadian government starting in mid-December 2024.

• The tax holiday notably reduced prices on various consumer goods, including dining, alcohol, and children’s toys.
• This fiscal policy change contributed to a significant 8.5% annual increase in restaurant meal prices.

Food Prices and Grocery Inflation

Food inflation in December continued to be influenced by the same tax relief measures. Grocery prices increased by 5% annually, a slight uptick from 4.7% in November.

• Specific food items saw sharp price increases:
  • Coffee: up over 30%
  • Fresh or frozen beef: up 16.8%
• Items affected by the tax holiday, such as potato chips and confections, also experienced notable price jumps.

Gasoline and Transportation Costs

Contrary to rising food prices, the cost of gasoline dropped by 13.8%. Poor global supply dynamics contributed to this decrease. In contrast, prices for air travel surged by 34.5% month-over-month, reflecting increased tourism costs for U.S. destinations.

Bank of Canada’s Interest Rate Outlook

The December inflation data may be the last significant indicator before the Bank of Canada’s first interest rate decision of the year, scheduled for January 28, 2026. Presently, the central bank maintains the benchmark interest rate at 2.25%. Financial markets currently project an 84% chance that this rate will not change in the upcoming review.

Economists, including Andrew Grantham from CIBC, have expressed that the surprising inflation rise is not alarming when assessed alongside stabilizing core inflation metrics. Grantham pointed out the volatility around certain items but stated that overall economic conditions suggest the Bank of Canada does not need to adjust rates.

Future Predictions on Inflation

Leslie Preston of TD Bank noted that while underlying inflation remains above the Bank of Canada’s 2% goal, it is trending closer to that target. Economic analysts agree that unless there is a significant negative shift in economic conditions or further easing in core inflation, the current interest rate will likely remain unchanged through 2026.

• Potential reasons for future policy adjustments include:
  • Negative growth outlook due to sour sentiment
  • Slowdown in inflation rates

In summary, while December’s inflation numbers reveal upward movement, the overall analysis by economists suggests that the Bank of Canada will likely hold its interest rates steady amidst current economic conditions. As inflation metrics continue to evolve, stakeholders will be watching closely for further updates.