Canada CPI expected to rise 1.8% in December, reinforcing BoC to further ease policy

  • The Canadian Consumer Price Index is expected to advance 1.8% year-over-year in December.
  • The Bank of Canada has reduced its interest rate by 175 basis points in 2024.
  • The Canadian dollar is at multi-year lows against its US counterpart.

Statistics Canada is set to release its latest December inflation report, based on the Consumer Price Index (CPI), this Tuesday. Early forecasts suggest that headline inflation could have increased by 1.8% compared to the same month last year.

In addition to the headline numbers, the Bank of Canada (BoC) will release its core CPI data, which excludes more unpredictable items such as food and energy. For context, November’s core CPI showed a 0.1% contraction compared to the previous month, but showed a 1.6% increase from a year ago. Meanwhile, headline inflation in November rose just 1.9% annually and remained stable on a monthly basis.

These inflation numbers are under the microscope, particularly due to their potential impact on the Canadian Dollar (CAD). The BoC’s approach to interest rates plays a critical role here. The central bank has already reduced its policy rate by 175 basis points since it began easing in June 2024, taking it to 3.25% on December 11.

On the currency front, the CAD has faced significant challenges, steadily losing value. This has taken the USD/CAD exchange rate to its highest levels since May 2020, surpassing the 1.4400 mark. Markets will pay close attention to Tuesday’s data to assess what could come next for the Canadian economy and its currency.

What can we expect from Canada’s inflation rate?

The Bank of Canada’s decision to cut rates by 50 basis points on December 11 to 3.25% was a tight decision, according to meeting minutes released on December 23. Some council members favored a smaller reduction of 25 basis points, which led to significant debate. Gov. Tiff Macklem noted that future cuts would likely be more gradual, marking a shift from previous messages about the need for continued easing. Proponents of the larger cut cited concerns about weaker growth and downside risks to inflation, although not all recent data supported such an aggressive move. The decision highlights the central bank’s careful navigation of economic uncertainties.

In light of the data release, analysts at TD Securities note: “We expect the CPI to rise to 2.0% YoY as prices fall 0.2% MoM. Seasonal headwinds for commodities will weigh heavily in terms MoM, while food prices and a weaker CAD provide a source of strength. Core inflation should slow by 0.2pp to 2.45% yoy. average, as the trimmed/median CPI exceeds the BoC’s projections for the fourth quarter, but we expect the BoC to overlook it in January.”

When will Canada CPI data be released and how could it affect USD/CAD?

Canada’s inflation report for December will be released on Tuesday at 13:30 GMT, but the Canadian dollar’s reaction will likely depend on whether the data delivers any major surprises. If the numbers line up with expectations, they are unlikely to influence the Bank of Canada’s current rate outlook.

Meanwhile, USD/CAD has been cruising in a consolidation range since mid-December, hitting multi-year highs just above the 1.4500 hurdle. This rise has been primarily driven by a robust rebound in the US Dollar (USD), largely attributed to the so-called “Trump trade,” which continues to put significant pressure on risk-sensitive currencies like the Canadian Dollar.

FXStreet Senior Analyst Pablo Piovano suggests that given the current scenario of persistent gains in the Dollar and high volatility in crude oil prices, further weakness in the Canadian Dollar should remain on the horizon for the time being.

“Bullish attempts should lead USD/CAD to another possible visit to the 2024 peak of 1.4485 (January 20), before the highest level reached in 2020 at 1.4667 (March 19),” adds Piovano.

To the downside, there is an initial support zone at the 2025 low of 1.4278 (Jan 6), ahead of the provisional 55-day SMA at 1.4177 and the psychological threshold of 1.4000. From here comes the November low of 1.3823 (Nov 6), closely followed by the more significant 200-day SMA at 1.3816. If USD/CAD breaks below this level, it could trigger additional selling pressure, initially targeting the September low of 1.3418 (September 25), notes Piovano.

economic indicator

Bank of Canada Core Consumer Price Index (MoM)

Statistics Canada It is the entity in charge of publishing the underlying consumer price index. The underlying CPI includes fruits, vegetables, gasoline, oil, natural gas, mortgage interest, urban transportation and tobacco. These eight volatile products are considered key indicators of inflation in Canada. A high reading anticipates a firm stance from the Bank of Canada, and is bullish for the Canadian dollar.


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Inflation FAQs


Inflation measures the rise in prices of a representative basket of goods and services. General inflation is usually expressed as a month-on-month and year-on-year percentage change. Core inflation excludes more volatile items, such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the target level of central banks, which are mandated to keep inflation at a manageable level, typically around 2%.


The Consumer Price Index (CPI) measures the variation in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage of inter-monthly and inter-annual variation. Core CPI is the target of central banks as it excludes food and fuel volatility. When the underlying CPI exceeds 2%, interest rates usually rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite occurs when inflation falls.


Although it may seem counterintuitive, high inflation in a country drives up the value of its currency and vice versa in the case of lower inflation. This is because the central bank will typically raise interest rates to combat higher inflation, attracting more global capital inflows from investors looking for a lucrative place to park their money.


Gold was once the go-to asset for investors during times of high inflation because it preserved its value, and while investors often continue to purchase gold for its safe haven properties during times of extreme market turmoil, this is not the case. most of the time. This is because when inflation is high, central banks raise interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity cost of holding Gold versus an interest-bearing asset or placing money in a cash deposit account. On the contrary, lower inflation tends to be positive for Gold, as it reduces interest rates, making the shiny metal a more viable investment alternative.

Source: Fx Street

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