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Canada’s annual inflation rate eased to its slowest pace in three months in December, driven by a federal tax holiday on items like restaurant meals and toys. According to Statistics Canada, the consumer price index (CPI) rose by 1.8% from a year earlier, aligning with market forecasts from economists at TD Securities.
The decline marks the fifth consecutive month of inflation remaining at or below the Bank of Canada’s target. However, when adjusted to exclude the impact of the tax break, the inflation rate would have been higher, reaching 2.3% annually.
On a month-over-month basis, prices fell by 0.4%, meeting expectations, while seasonally adjusted CPI showed a modest increase of 0.2% compared to the previous month. This suggests that while certain categories benefitted from temporary tax relief, broader price pressures remain steady.
Underlying inflation measures also indicated a cooling trend. The average of the Bank of Canada’s preferred trimmed mean and weighted median indices slowed to 2.45% year-over-year, down from 2.6% in November, marking the slowest growth since September. These measures, which filter out volatile price changes, provide a clearer picture of the broader inflation trajectory.
Despite the temporary impact of the tax holiday, economists are keeping a close eye on core inflation trends. The Bank of Canada is expected to consider this data as it evaluates future interest rate policies. A sustained moderation in inflation could provide room for a more dovish approach, potentially supporting growth in the months ahead.
Meanwhile, the housing and energy sectors showed mixed trends. Gasoline prices remained steady after months of fluctuation, while housing costs reflected modest increases in rental and mortgage-related expenses. These sectors will likely play a key role in shaping inflationary pressures as the federal tax relief expires.
The report underscores the delicate balance the Canadian economy faces, with temporary measures offering short-term relief but leaving underlying price pressures to be addressed in the long term. Policymakers and businesses alike will be closely monitoring upcoming data for signs of sustained changes in inflation trends.
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