Canadian Inflation Surprises Markets, Rising to Highest Level in Three Months

Canada's annual inflation rate recorded an unexpected increase in December 2025, reaching 2.4% compared to 2.2% in November. This figure outpaced market expectations, which had anticipated inflation to remain near its previous level, and also exceeded the Bank of Canada's projection for inflation to stay around 2% in the near term. The acceleration was mainly attributed to base effects following the expiry of temporary exemptions from the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST) that had been in place until December 2024. This led to significant price increases in certain categories, most notably restaurant food (8.5% versus 3.3% in November), alcoholic beverages purchased from stores (5.6% versus 3%), and games and hobbies (7.5%, reversing a previous decline). Conversely, some components saw slower growth, with housing inflation dropping to 2.1% and transportation prices falling by 0.5%. As a result, the Bank of Canada's closely watched median core inflation rate fell to 2.5%, its lowest level in a year, signaling relative moderation in underlying price pressures despite the higher headline figure.