December’s inflation data offered a mixed bag to the Bank of Canada as it gears up for its first interest rate decision of 2025 with U.S. President Donald Trump’s tariff threats still looming over the Canadian economy.

Statistics Canada said Tuesday that the annual pace of inflation cooled to 1.8 per cent last month, down one-tenth of a percentage point from November.

The agency pointed to Ottawa’s GST/HST “holiday,” which began Dec. 14, as the main factor pulling price pressures down. Roughly 10 per cent of StatCan’s representative basket of consumer goods is included in the federal tax break, which includes many grocery items, restaurant meals, alcoholic beverages and children’s toys and clothing.

Excluding food, the consumer price index rose at a pace of 2.1 per cent, StatCan said.

The impact of the tax holiday is expected to be even more pronounced in the January inflation data, which will capture a full-month of price reductions.

The Bank of Canada will be poring over the latest figures ahead of its first interest rate decision of the year, set for Jan. 29.

TD Bank senior economist Leslie Preston told Global News on Tuesday that the inflation relief tied to the tax holiday is going to be temporary and prices will rise again when it ends, so the Bank of Canada will largely “look through” those blips as it gauges longer-term price trends.

Inflation has cooled significantly from the 40-plus-year highs seen in 2022, thanks in part to a rapid tightening cycle from the Bank of Canada.

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The central bank has since dropped its benchmark interest rate in five consecutive decisions as inflation eventually fell below its target of two per cent. The Bank of Canada’s policy rate now sits at 3.25 per cent, the top of a “neutral” range where economists believe the cost of borrowing is neither too restrictive or stimulative for the economy.

December’s inflation data reveals those “underlying” price pressures that Preston referred to reaccelerated a bit over the past three months.

She said it’s too early to sound “alarm bells” over core inflation, but said the early trends reinforce that the Bank of Canada may be in position to slow down its easing cycle in 2025.

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TD Bank expects another 25-basis-point rate cut at next week’s rate decision, but Preston said the central bank may take a more wait-and-see approach going forward.

Inflation pressures can “bubble up temporarily, but if they become more persistent, it may warrant a longer pause on interest rate moves,” Preston said.

Currency markets are also betting an 81 per cent chance of a quarter-point cut next week, according to Reuters.

Casting a shadow over the Bank of Canada’s decisions are renewed threats of tariffs from the United States, which President Donald Trump warned late on his first day in office could come as early as Feb. 1.

BMO chief economist Doug Porter said in a note to clients Friday that the looming trade uncertainty with the U.S. “overrides” fears of price pressures picking back up.

“As a result, we suspect that today’s reading is just good enough to allow the Bank of Canada to trim next week, for risk management purposes,” he wrote.

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Preston said that, while the Bank of Canada might not have clarity yet on whether Trump’s tariffs are implemented, the central bank is able to capture how Canadian businesses are responding to the threats.

The Bank of Canada’s quarterly survey of firms published on Monday showed Trump’s tough talk on trade is affecting business confidence.

The likelihood of some kind of trade disruption with the U.S. is holding back some companies from investing more widely in Canada this year, Preston said, which is enough itself to hamper some hope of an economic rebound.

“We don’t actually have to have the tariffs for it to send a chill through the investment climate,” she said.

RBC economists Nathan Janzen and Abbey Xu said in a note Tuesday that the threats of Trump tariffs already come as Canada sports a sluggish economy and rising unemployment rate. That backdrop makes the argument for lower interest rates from the Bank of Canada to gird the economy against further slowing, they said.

Canada’s largest grocer meanwhile says a confluence of factors including a weak loonie mean grocery prices will continue to rise faster than overall inflation.

Loblaw released a report on food inflation Monday evening, hours before StatCan’s own price report.

The grocer says many suppliers are still proposing price increases above inflation, while supply chain issues, a weaker dollar and rising production costs are also making food more expensive.

Loblaw’s report highlights several commodities that have seen particularly sharp price increases, including coffee and cocoa, which have seen their crops hit by poor weather.

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The grocer says the cost of beef has also climbed to all-time highs, while olive oil prices should ease somewhat after recent shortages.

Since Canada imports much of its fresh produce from the U.S., especially during the winter, a weaker loonie makes those products more expensive, Loblaw said in its report.

“While food inflation has returned to more typical levels, grocery prices are still rising faster than overall inflation — a trend we expect to continue.”

Gasoline prices were up 3.5 per cent year-over-year last month, compared to a decline of a half a percentage point in November. The upward swing in December came in part because of a modest annual drop in the same month a year earlier; prices were down 0.4 per cent on a monthly basis.

Travel services also saw a sharper swing up in December because of steep annual price drops a year earlier.

But prices for traveller accommodation in British Columbia also surged 62 per cent month-to-month, the same month Taylor Swift’s Eras Tour closed out in Vancouver.

“The swift month-over-month increase was the largest on record for any province and coincided with a high-profile concert series,” StatCan said.

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Shelter price inflation decelerated in December but remains elevated, StatCan said. Rent prices in Canada were up 7.1 per cent annually in December and up 22.1 per cent over the past three years, the agency said.

Mortgage interest costs meanwhile decelerated for the 16th consecutive month amid lower interest rates from the Bank of Canada.

— with files from The Canadian Press and Reuters