Canada’s consumer price index rose 1.8 per cent in December from the year before, less than the 1.9 per cent increase expected by economists, giving the Bank of Canada a final data point before it meets Jan. 29 to announce its next interest rate decision.

Statistics Canada on Tuesday said the federal government’s GST/HST tax holiday on certain goods, including food at restaurants and alcoholic drinks, contributed to slower inflation growth in the month.

The agency, which calculates the price of goods including consumer taxes, said the CPI rose 2.1 per cent in December when food is excluded.

Here’s what economists think the data means for the Bank of Canada and interest rates.

Inflation rebound looms: Oxford Economics

Canadians should expect some inflation volatility and a rebound above two per cent in March once the effects of the GST/HST tax holiday fall out of the mix, economist Michael Davenport at Oxford Economics Canada said in a note.

He also expects inflation to get another “bump” in April when the federal carbon tax levy is scheduled to increase, while threats of tariffs from the United States “and the potential elimination of the carbon tax with a change in government risk driving more inflation volatility in the year ahead.”

Sifting through the “weeds” of the December CPI report, Davenport said “inflationary pressures still appear benign.”

The Bank of Canada has previously said it sets aside temporary effects on inflation, such as the current tax holiday, and instead focuses on broader trends and the state of economic slack.

“(That) will keep it on track to cut rates 25 basis points later this month,” he said.

Bank of Canada far from done: David Rosenberg

“The Bank of Canada’s job is still far from done even after the cumulative 175 basis points of rate cuts from the five per cent cycle peak to the high end of its ‘neutral’ range,” economist David Rosenberg, founder of Rosenberg & Associates Inc., said in a note.

The Bank of Canada’s neutral range for interest rates — where they neither stimulate nor restrict economic growth — is 2.25 per cent to 3.25 per cent.

Mortgage costs have been one of the main drivers of accelerating inflation since the Bank of Canada started hiking rates in early 2022.

But Rosenberg likes to strip out mortgage interest costs when looking at inflation because they are “a drain on consumer spending power rather than a true source of demand-induced inflation.”

That means his preferred measure of inflation came in at 1.3 per cent year over year, he said.

“This is not an attempt to downplay the importance of shelter costs as much as the need to point out that the other 70 per cent of the pricing pie is tracking below a plus-one per cent inflation rate now each and every month since last August,” he said.

There is a case to be made for “disinflation,” leaving the Bank of Canada to play “catch down” on rates, he said.

More rate cuts needed: RSM Canada

“Even though the impact of the tax holiday will be temporary, disinflation is a clear trend that has persisted and calls for more rate cuts from the Bank of Canada,” Tu Nguyen, an economist with tax consultancy RSM Canada, said in a note.

But the terrain ahead for the Bank of Canada is “tricky,” she said, citing a weakening Canadian dollar versus its U.S. counterpart and the upheaval around trade with the arrival of Donald Trump.

RSM expects the Bank of Canada to cut rates by 25 basis points next week, slowing the pace of reductions after implementing two jumbo-sized 50-basis-point trims late last year.

“This cut will mark a further deviation from the U.S. Federal Reserve, but might be necessary to maintain price stability and boost growth,” Nguyen said.

The Bank of Canada and the Fed are on diverging paths, with the former set to pursue more cuts while the latter is looking at holding off further rate cuts because the U.S. economy continues to generate strong growth and employment numbers. The top end of the Fed’s current lending rate is 4.5 per cent.

Deviation between the two rates is always on economists’ minds since the wider the spread, the lower the Canadian dollar could fall, thereby stoking inflation.

“After the tax holiday ends, consumers will need the push of lower interest rates to keep up spending,” Nguyen said. “Without further rate cuts, the economy will continue at a sluggish pace and inflation might fall further below the two per cent target.”

‘What’s the rush to cut?’: Scotiabank

“I don’t believe that the (Bank of Canada) should cut, but it may well take the easy route in what’s priced,” Derek Holt, vice-president and head of capital markets economics at the Bank of Nova Scotia, said in a note, referring to the 80 per cent bet markets have on a rate cut next week.

The reason he doesn’t think policymakers should cut is because core inflation measures are well above the two per cent target.

For example, core median and trim CPI, policymakers’ preferred measures, are coming in at a hot 2.8 per cent and 3.5 per cent, respectively, on a seasonally adjusted annual rate.

Take into account the “rebounding consumption in per capita terms” as well as a gross domestic product figure that could come in at two per cent annualized or more in the fourth quarter, and Holt thinks the case for a hold next week only gets stronger.

The possibility of U.S. tariffs and Canadian retaliation will also add pressure on prices.

“Therefore, what’s the rush to cut after 175 basis points of cuts to date?” he said. “I know one thing for sure: I wouldn’t cut at this point while leaving all options open going forward.”

• Email: gmvsuhanic@postmedia.com

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