Canada's Inflation Eases Amid Tax Breaks

Canada's annual inflation rate decreased to 1.8% in December due to a sales tax break affecting items like alcohol and children's clothing. This rate drop may provoke another interest rate cut by the Bank of Canada, which has already reduced the key rate by 175 basis points since June.

Canada's inflation rate decelerated to 1.8% in December, as reported by Statistics Canada, with a sales tax break playing a significant role in the reduction. Prices for alcohol, restaurant foods, and children's clothing saw the most impact. This drop was slightly below forecasts and the previous month's rate.

December's inflation decrease was buoyed by a 1.3% decline in alcoholic beverage prices in stores and a 1.6% drop in restaurant food costs. These reductions were stark contrasts to the increases seen the previous month, illustrating the tax break's impact on consumer prices, which account for all excise and additional taxes.

The continuing easing of inflation, maintaining levels at or below the Bank of Canada's 2% target since August, has influenced the bank's decisions to cut its key policy rate. Currency markets currently show an 81% probability of a 25 basis point reduction on January 29, attributed to the evolving economic conditions indicated by the latest inflation data.

(With inputs from agencies.)