(Bloomberg) -- For the first time since 2019, Canadian inflation stayed within the central bank’s target range for a full year, a mark of achievement for policymakers ahead of a potential tariff war that threatens to derail their progress.
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The consumer price index ended 2024 with a second consecutive monthly deceleration, rising 1.8% on a yearly basis in December, down from 1.9% previously, Statistics Canada reported Tuesday. The median estimate in a Bloomberg survey of economists was for a 1.9% gain. On an annual average basis, prices increased 2.4% last year, following a 3.9% gain in 2023.
The deceleration was driven by lower prices for food from restaurants and alcoholic beverages, which are exempted from sales tax from Dec. 14 to Feb. 15. Taking out items impacted by the tax break, which made up about 10% of the CPI basket, the headline index would likely accelerate to 2.3% — still within the bank’s target of 1% to 3%.
On a monthly basis, the index declined 0.4%, matching economists’ expectations.
Bonds rallied, taking the yield on the two-year Canada benchmark note to 2.877% — the lowest intraday in more than a month.
The Canadian economy is facing considerable uncertainty, however, as US President Donald Trump has signaled plans to impose tariffs of as much as 25% on Canada by Feb. 1 and Prime Minister Justin Trudeau’s government has vowed to retaliate.
A trade war would likely force the Bank of Canada to adjust their rate-cut campaign to brace the economy for the impact on consumer prices. Governor Tiff Macklem has said he wants to strengthen economic growth, which has been weaker than expected.
The central bank next sets the benchmark overnight rate on Jan. 29, when it will also update economic forecasts. The majority of economists in a Bloomberg survey expect policymakers to slow down the pace of easing, shifting back to a regular 25 basis-point cut next week after reducing borrowing costs aggressively in the final quarter of last year.
“The Bank of Canada might be rethinking its bias toward rate cuts as the threat of tariffs looms closer. Central banks aren’t immune to uncertainty, and while there’s still room to maneuver with moderating inflation, there are signs of activity picking up,” Andrew DiCapua, senior economist at the Canadian Chamber of Commerce, said in a report to investors.