At the end of 2025, Canada’s inflation rate went up, but the headline number makes it sound worse than it is. In December, consumer prices went up 2.4% from the same month last year. This was more than expected and more than the 2.2% rise in November. At the same time, Canada’s most closely watched core inflation measures kept going down, which means that prices are becoming less of a problem.
This is the kind of inflation report that makes people feel both good and bad. Canadians are still feeling the pinch at the grocery store and when they eat out, though. On the other hand, the data shows that inflation is not getting out of hand, and the Bank of Canada may be able to keep interest rates steady until 2026.
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This is a detailed look at what caused inflation to rise in December, why core inflation is sending a calmer message, and what it could mean for mortgages, the Canadian dollar, and everyday costs in the coming year.
The Big Headline: Inflation Rose to 2.4% in December
The yearly inflation rate went up to 2.4%, which was higher than what the market expected. A lot of experts thought that inflation would stay at 2.2%.
Why This Number Is Important
The year-over-year CPI number is the one that most Canadians hear about because it shows how much prices have gone up since the same month last year. It has an effect on:
- How people think about how affordable something is
- How companies decide on prices
- How wage talks go
- How central banks set interest rates
It may not seem like a big deal that the rate went from 2.2% to 2.4%, but it can change people’s expectations. When inflation looks like it’s going up again, the markets start to wonder if rate cuts are still possible.
The monthly CPI dropped by 0.2%, which changes how we see it.
The annual number went up, but the monthly CPI went down by 0.2%. That means that, on average, prices were a little lower in December than they were in November.
This is an important piece of information because it suggests that new price increases from month to month are not causing inflation to rise faster. Instead, it points to statistical effects and certain groups that make the yearly comparison go up.
The Important Point: Core Inflation Measures Kept Going Down
When deciding on interest rates, core inflation is often more important than headline inflation. It is meant to get rid of noise and show if price pressures are widespread and long-lasting.
Both CPI-Median and CPI-Trim went up.
The CPI-median and CPI-trim, which are Canada’s preferred core measures, fell for the third month in a row and were at their lowest levels in about a year.
- The CPI-median went down from 2.8% to 2.5%.
- The CPI-trim rate dropped from 2.9% to 2.7%.
This is the part of the report that probably made the Bank of Canada feel better. Even though the headline inflation rate is going up, the underlying trend seems to be getting closer to the central bank’s 2% goal.
Why a drop in core inflation is more important than a single headline jump
There are many reasons why the headline inflation rate can go up in a month. But core inflation has been going down for several months, which could mean that prices are rising more slowly overall.
That usually means:
- Inflation is not affecting as many parts of the economy as it used to.
- Many categories are seeing less severe price increases.
- The Bank of Canada doesn’t have to overreact.
The December report looks more like a bump than a start of runaway inflation, in other words.
What Made the Headline Inflation Rate Go Up in December?
A sudden new wave of price increases was not the biggest reason. The comparison month from the previous year had prices that were much lower than usual because of a temporary tax policy. This is what we call a “base effect.”
The sales tax break had a base effect.
In December 2024, some things were eligible for a temporary GST/HST tax break. Inflation looks higher than it would if you compared prices in December 2025 to that artificially low baseline.
Because of a policy change that happened once last year, the annual comparison is off, which can make inflation seem worse than it really is.
Prices at restaurants were a big part of it.
One of the biggest reasons for faster inflation growth in December was the cost of food.
This is important because restaurant prices tend to stay the same. Restaurants have to pay more for rent, food, utilities, and wages. When menu prices go up, they don’t go down very often.
For Canadians, this looks like:
- Takeout that costs more
- Prices at coffee shops are higher
- More expensive casual dining
- Fast food that costs more
Restaurant inflation affects families of all income levels because even going out to eat once in a while is now much more expensive than it used to be.
Petrol helped keep inflation from going up too much.
Not everything went up. Petrol prices dropped a lot from one year to the next, which helped keep inflation from going up too much.
Petrol prices went down 13.8% from last year to this year.
Compared to the same time last year, petrol prices went down a lot. That drop slowed down inflation and kept the overall CPI number from going up even more.
Why Energy Prices Can Change the Inflation Picture So Quickly
Energy prices change a lot, making them one of the most volatile parts of the CPI basket. Lower petrol prices can quickly help bring down inflation. But if oil prices go up, it can change quickly.
That’s why central banks usually pay more attention to core inflation than big swings in energy prices.
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Inflation for services went up, but inflation for goods went down.
There is more than one kind of inflation. Prices for goods and services are different, and they act differently.
Inflation in services sped up
The cost of services went up from 2.8% to 3.3%. This is important because services inflation is more often caused by things like wages and demand at home than by things happening in the global supply chain.
Some examples of services are:
- Food from restaurants
- Haircuts and taking care of yourself
- Services for travellers
- Financial and insurance services
- Costs related to rent
When the cost of services keeps going up, it can mean that inflation is already in the local economy.
Inflation for goods went up more slowly.
Goods inflation went up 1.2% after going up 1.5% the month before.
Things that are goods are:
- Clothes
- Things for the house
- Devices and appliances
- Products in packages
A trend of softer goods inflation suggests that supply chains and product prices aren’t driving inflation as much as they did during previous spikes.
What This Means for the Bank of Canada’s Interest Rates in 2026
The December inflation report backs up the idea that the Bank of Canada can keep rates steady, even if the headline number goes up a little bit.
The Bank of Canada Can Stay on Hold
In December, the Bank of Canada kept its policy rate at 2.25% and said that this was the right level to keep inflation close to its target.
The Bank has proof that inflation isn’t rising too quickly because core inflation is going down and the monthly CPI is going down.
Why it still doesn’t look like rate cuts will happen soon
The Bank will want to see steady progress, even though core inflation is getting better. The headline CPI is not yet clearly below target, and services inflation is still high.
That means that the most likely thing to happen in early 2026 is that things will stay stable instead of cuts happening right away.
What Would Change the Rate Outlook
The rate outlook could shift if one of these happens:
- Core inflation drops closer to 2% and stays there
- The economy grows more slowly.
- Unemployment goes up enough to ease wage pressures.
- Housing and consumer spending drop a lot.
If those conditions happen later in 2026, it is more likely that rates will go down.
What the Inflation Report Did to the Canadian Dollar
After the report, the Canadian dollar got a little stronger and gained ground against the U.S. dollar. The Loonie Went Up Even Though Inflation Went Up
Markets probably focused on the idea that core inflation is getting better, which makes surprise rate hikes less likely. At the same time, the loonie also got support from the fact that the U.S. dollar was weak in general.
Not only does inflation affect currency markets, but so does what inflation means for interest rates compared to other countries.
What This Report on Inflation Means for Canadians
Inflation may be close to the target, but a lot of families still feel tight. That’s because some groups, like food and restaurants, are still very expensive.
Costs of groceries and eating out are still high.
Prices don’t go back down even when inflation slows down. They just go up more slowly. That means Canadians are still dealing with:
- More money spent on groceries
- Prices for coffee and snacks are going up.
- Bills from restaurants are higher
- More expensive everyday services
Inflation is slowing down, but prices are still not back to normal.
This is what makes a lot of people angry. Just because inflation is going down toward 2% doesn’t mean prices will go back to what they were in 2019. It just means that prices are going up at a more normal rate.
For families, things really get better when wages rise faster than prices for a long time.
The Bottom Line: Headline Inflation Went Up, but the Trend Is Still Getting Better
In December, Canada’s inflation rate rose to 2.4%, which was higher than expected. However, most of that rise was due to base effects from a previous sales tax break. The most important sign for policy is that core inflation measures kept going down, which means that inflation is easing.
This means that the Bank of Canada can keep interest rates steady in 2026, especially if core inflation keeps going down. Canadians may not see a drop in their daily costs right away, but the data shows that inflation is going in the right direction, even if it is taking longer than many people hoped.
