Thoughts

January 23, 2026 | 13:49

Under the Hood of Canadian Inflation

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Canada’s annual CPI rate rose to 2.4% in December from 2.2% the prior month. Adding to the upturn was the reversal of the temporary removal of sales taxes on some items (e.g., books, alcohol, restaurant meals) a year earlier. Working the other way, however, is that the headline rate would be roughly 0.7 ppts higher (according to the Bank of Canada) if not for the removal of the consumer carbon tax last April, which will fall out of the year-over-year calculation this April. The removal primarily lowered gasoline prices, which were down 13.8% y/y in December. So, underlying inflation likely remains above 2%.

Rising food costs are a key reason why. Their hefty 6.2% y/y increase and chunky 17% share of the consumer basket accounted for one percentage point of inflation in the past year, or almost half. In addition, hot producer food prices, though cooling a bit to 8.5% y/y in December, suggest little near-term relief in the grocery aisle. Inflation ex-food and energy is at 2.5%, holding to a narrow range last year.

The better news is that the unwinding of the GST holiday effect didn’t prevent the key core metrics from slowing by a quarter ppt in December, with Trim at 2.7% and Median at 2.5%. In fact, their respective three-month annualized rates are even softer at 1.9% and 1.5% (Chart 1). Still, the overall data largely confirm the BoC’s view that underlying inflation is around 2½%, albeit with downward potential.

Outside of food, inflation pressure is mostly in services and a few goods. Jewelry prices jumped 20% on surging gold prices, while new vehicle costs are up 3.3%. But these increases are mostly offset by cheaper household appliances and clothing, both down about 2% in the past year. As a result, goods prices rose just 1.2% and are steadying now that most counter-tariffs on U.S. goods have been removed.

It is in the services sector that inflation remains hotter and stickier, at 3.3% and little changed from late 2024. Some heavy hitters include: personal care (4.8%), recreation (6.5%), spectator entertainment (6.6%), and cellular phone services (14.6%). Still, shelter cost growth has moderated to 2.1% from 4.5% in late 2024 amid ebbing mortgage interest costs, falling replacement costs (amid a 2% drop in new home prices in the past year), and lower natural gas costs (-15.3%, prior to the recent spike). Unhelpful have been rising property taxes (5.6%) and home insurance costs (5.3%), as well as still-stubborn rent increases (4.9%), though this should ease with average asking rents down 2.3% y/y in December.

The upshot is that while underlying inflation is likely still above the 2% target, it seems to be pointed in the right direction. That may not compel the central bank to resume rate cuts, but it should quell any chatter about hikes.