Jan 20th, 2026: Canada’s inflation rate edged higher in December, with the Consumer Price Index (CPI) rising 2.4% year over year, up from 2.2% in the previous two months. While the headline number came in slightly hotter than expected, the increase was largely driven by temporary factors — not a resurgence of underlying inflation pressure.
Why Inflation Tickled Higher
The main reason for the uptick was the temporary GST/HST tax break that was in effect at the end of 2024. During that period, several consumer items — including restaurant food, alcohol, toys, and select household goods — were temporarily exempt from sales tax.
As those lower prices dropped out of the annual comparison, inflation appeared to rise, even though actual month-to-month price growth remained muted.
In fact, on a monthly basis, CPI fell 0.2%, while seasonally adjusted numbers showed only a modest increase.
Gasoline prices continued to decline year over year, helping to offset some of the upward pressure from food and consumer goods.
Food Prices Remain the Biggest Pressure Point
Food continues to be the most noticeable area of inflation for Canadians:
- Restaurant prices rose 8.5% year over year
- Grocery prices increased 6.2%
- Coffee prices surged more than 30%
- Beef prices climbed nearly 17%
- Children’s clothing, toys, and hobby items also saw sizable increases
These increases explain why inflation still feels high for many households, even as broader inflation metrics cool.
Core Inflation Is Moving in the Right Direction
Despite the headline increase, the Bank of Canada’s preferred core inflation measures continued to improve.
- Core inflation eased to 2.6%, down from 2.9%
- On a three-month annualized basis, core inflation slowed to 1.7%
- This marks the lowest level in over a year
This is an important signal for policymakers. It suggests that inflation is gradually coming under control, even if certain categories remain elevated.
What This Means for Interest Rates
The latest data reinforces the Bank of Canada’s current stance: rates are likely to remain on hold.
Economists and market participants widely expect:
- No near-term rate cuts
- No urgency to raise rates further
- A prolonged pause through most of 2026
Bond markets reacted calmly to the report, and economists largely agree that the data doesn’t justify a policy shift at this time.
While inflation remains above the Bank of Canada’s 2% target, it is moving in the right direction — especially once temporary tax effects fade from the data.
Impact on the Housing Market
Housing continues to be the sector most affected by higher interest rates. Activity remains soft, particularly in Ontario, where affordability challenges and economic uncertainty have weighed on buyer confidence.
That said, stability in rates — even without cuts — provides some relief. As inflation eases and economic clarity improves, confidence should gradually return to the market.
Much will also depend on developments in trade policy and the broader economic outlook, particularly with the U.S. A reduction in uncertainty could help unlock pent-up demand later this year or into 2026.
Bottom Line
- Inflation rose to 2.4%, mainly due to temporary tax effects
- Core inflation continues to cool
- The Bank of Canada is likely to remain on hold for most of 2026
- Rate cuts are unlikely in the near term
- Housing remains soft but may stabilize as inflation improves
For homeowners and buyers, this reinforces the importance of rate strategy and timing — especially as fixed and variable options continue to shift.
If you’d like help understanding how today’s rate environment affects your mortgage, renewal, or purchase plans, feel free to reach out anytime.
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