Canadian consumer prices fell 0.4% month-over-month in December, bringing the headline inflation rate slightly lower to 1.8% from November’s 1.9%.
The decline was heavily influenced by the mid-month GST/HST holiday that took effect December 14th. The tax break had notable impacts across several consumer categories:
- Food from restaurants plunged 4.5% m/m
- Alcoholic beverages dropped 4.1% m/m
- Toys and games decreased 7.1% y/y
- Grocery prices moderated, bringing yearly food inflation down by 1.6% y/y
Meanwhile, core inflation measures revealed underlying pressures.
While the Bank of Canada’s (BOC) preferred gauges eased slightly – median CPI dipped to 2.4% and trimmed mean CPI edged down to 2.5% year-over-year – their three-month trends accelerated notably to 3.4% for median and 3.7% for trimmed mean CPI. This persistent core strength may give the BOC pause about cutting rates too quickly.
Link to Canada’s Consumer Price Index Report (December 2024)
Some sectors also showed surprising strength despite the tax holiday:
- Hotel rates remained flat in a typically weak season, pushing yearly rates up 13.6%
- British Columbia hotels saw a dramatic 56.7% year-over-year surge
- Gasoline prices fell just 0.6% monthly but rose 3.5% annually
- Shelter costs continued cooling gradually, with rents at 7.1%
- Mortgage interest costs moderated to 11.7%
Looking ahead, while the GST/HST impact could continue supporting January’s inflation reading, this effect may reverse in subsequent months.
Market Reactions
Canadian Dollar vs. Major Currencies: 5-min
Overlay of CAD vs. Major Currencies Chart by TradingView
The Canadian dollar, which had been seeing slight downtrends during the early European session, dropped at the cooler-than-expected CPI headline numbers.
However, markets soon digested the sticky high averages for the core readings. Remember, the market’s 80% odds on a rate cut next week don’t quite line up with the data or the BOC recent shift to a less dovish tone. Core inflation is still running hot and BOC’s hints of “more gradual” policy tweaks don’t exactly scream January rate cut.
Traders who now expect the BOC to hold its rates steady or maybe stick to a modest 25bps cut probably bought the Loonie.
Crude oil prices also turned higher shortly after Canada’s inflation release, which contributed to a broad and steady uptick in the demand for the oil-related CAD during the U.S. session.
The comdoll swung higher against its counterparts and capped the day close to its intraday highs.
