By Promit Mukherjee
OTTAWA (Reuters) -Canada's annual inflation rate slowed in December, data showed on Tuesday, helped by a sales tax break which kicked off in the middle of the month and brought down prices of alcohol, restaurant foods and children's clothing.
The annual inflation rate dropped to 1.8%, Statistics Canada said, slightly lower than expected and a tick below the prior month's 1.9%. On a month-on-month basis the consumer price index contracted by 0.4%.
On an annual basis, prices for alcoholic beverages purchased from stores declined 1.3% in December, compared with a 1.9% increase in November, and food purchased at restaurants dropped by 1.6% in December from a rise of 3.4% the previous month.
The prices included in the Consumer Price Index are inclusive of all excise and other taxes paid by consumers, and as a result any tax break brings down the prices recorded by the statistics agency.
The sales tax break, which impacted a tenth of the components of the CPI basket, will continue until mid-February and the month of January will see a full month of exemption versus 18 days in December, Statscan said.
Analysts polled by Reuters had forecast the annual inflation rate at 1.9% and a contraction of 0.4% on a monthly basis.
The consistent easing of prices, which has stayed at or below the Bank of Canada's target of 2% since August, has helped the bank to slash its key policy rate by a total of 175 basis points from June to 3.25%.
A further drop in inflation in December could prompt the central bank to cut rates again next week, although the BoC Governor Tiff Macklem had said last month that further rate cuts would be gradual.
Currency markets are betting an 81% chance of a 25 basis point rate cut on Jan. 29.
The Canadian dollar was trading weaker by 0.90% to 1.4435 against the dollar, or 69.27 U.S. cents.
"Overall, there are a lot of moving pieces and temporary factors playing out in the inflation data at the moment," said Andrew Grantham, senior economist with CIBC (TSX:CM) Capital Markets said.
"But... underlying price pressures appear to be close to 2% and we continue to expect a 25 bp (basis point) reduction in interest rates from the Bank of Canada next week," he added.
The BoC's preferred measures of core inflation, CPI-median and CPI-trim, also edged down, nearing the 2% mid-point of the bank's 1-3% target range.
CPI-median - or the centermost component of the CPI basket when arranged in an order of increasing prices - eased to 2.4% from 2.6% in September, while CPI-trim - which excludes the most extreme price changes - dropped to 2.5% from downwardly revised 2.6% in the prior month.
Shelter prices - rent and mortgage costs - rose by 4.5% in December on an annual basis, slightly down from the prior month but still elevated.
Year over year, prices for gasoline rose 3.5% in December compared with a 0.5% decline in November, mainly due to a base-year effect as prices declined heavily in December 2023, Statscan said, adding that on a monthly basis prices fell 0.6% in December 2024.