Canadian Inflation Ticks Up to 2.4 Percent Driven by Past Tax Comparisons
Ottawa, Tuesday, 20 January 2026.
Headline inflation hit 2.4 percent due to tax-year effects, yet core prices cooled. Strikingly, coffee prices surged 30.8 percent, highlighting persistent grocery affordability issues despite stabilizing trends.
Analyzing the Headline Acceleration
Statistics Canada released data on Monday showing the Consumer Price Index (CPI) rose 2.4 percent on an annual basis in December 2025, accelerating from a 2.2 percent increase in November [1][2]. This reading surpassed the consensus estimate of 2.2 percent anticipated by economists [3]. However, analysts emphasize that this uptick is largely technical; it stems from a “base-year effect” caused by a temporary sales tax holiday implemented by the federal government in December 2024 [1][3]. Because prices were artificially lowered during that period a year ago, current prices appear sharply higher by comparison [3].
Core Trends Signal Cooling
Despite the headline acceleration, underlying price pressures are actually subsiding. The Bank of Canada’s preferred core inflation measures—CPI-median and CPI-trim—cooled for the third consecutive month [1]. CPI-median slowed to 2.5 percent from 2.8 percent in November, while CPI-trim eased to 2.7 percent [1]. This divergence suggests that the broader inflationary trend remains downward, aligning with the central bank’s targets [1].
The Impact of Tax Anomalies and Volatility
The distortion caused by the tax policy comparison is most evident in specific sectors. The tax break, which began in mid-December 2024, applied to items such as restaurant food, children’s clothing, and toys [2]. Consequently, as the tax holiday fell out of the annual comparison, restaurant prices posted a significant 8.5 percent year-over-year increase in December 2025 [3]. Conversely, monthly volatility was driven by the travel sector, where airfare prices surged 34.5 percent from the previous month [3].
Grocery Costs vs. Energy Relief
While statistical quirks explain part of the data, Canadian households continue to face tangible pressure at the grocery store. Prices for food purchased from stores rose 5.0 percent year-over-year [2]. Specific commodities saw dramatic escalations; coffee prices spiked 30.8 percent, and fresh or frozen beef rose 16.8 percent [2]. In contrast, energy costs provided a buffer against overall inflation. Gasoline prices fell 13.8 percent annually, driven by a global oversupply of crude oil [3][4].
Outlook for Interest Rates
The Bank of Canada, which held its benchmark interest rate at 2.25 percent in December, is set to make its next rate announcement next week [3][4]. Given that core inflation is tracking close to the 2 percent target, economists view the December headline beat as “less concerning” [3]. Market data suggests an 84 percent probability that the central bank will maintain the current rate at its January 28 meeting [5]. Senior economists argue that the data remains consistent with a long-term moderation of inflation, reinforcing expectations for a policy hold [1][4].