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Canada’s inflation rate drops to 1.8% in December due to federal tax break

21st Jan 2025: Canada’s inflation rate dropped to 1.8% in December, thanks in part to the federal government’s temporary sales tax exemption, Statistics Canada reported on Tuesday. This decrease follows November’s 1.9% rate and came in slightly lower than analysts had expected.

The tax holiday, which applies to restaurant food, alcohol, and children’s clothing, helped bring down overall prices. Without food included, inflation stood at 2.1% for December. The impact of the tax break was particularly noticeable in alcohol prices, which fell by 1.3% compared to a 1.9% rise in November. Restaurant food prices also saw a sharp decline, dropping 1.6% after a 3.4% increase the previous month.

Housing costs continued to rise, increasing by 4.5%, though at a slower pace than November’s 4.6%. Meanwhile, gas prices went up by 3.5%, mainly due to what economists call a “base-year effect” – a comparison to lower prices from the previous year.

With inflation remaining at or below the Bank of Canada’s 2% target since August, the central bank has already reduced its key interest rate by 175 basis points, bringing it to 3.25% since June. December’s further drop in inflation raises speculation that another rate cut could be announced next week. However, Bank of Canada Governor Tiff Macklem previously indicated that any additional rate cuts would be gradual.

The central bank’s core inflation measures, CPI-median and CPI-trim, also showed slight declines, reinforcing the overall trend of easing price pressures.

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