Canada’s Inflation Rate Hits 2.4%: Implications for Investors & Interest Rates

Canadian inflation is back in focus after new data showed prices rising faster than expected to end the year. The December jump in Canada’s inflation rate has renewed questions about where interest rates are headed and how the Bank of Canada may respond in 2026. For investors, inflation trends matter—not just for household budgets, but for market direction, monetary policy, and long-term trading opportunities.

What’s Canada’s Inflation Rate?

Canada’s inflation rate climbed more than expected in December 2025 to 2.4%, even though analysts were expecting the annual inflation rate would echo the 2.2% recorded in November. On a monthly basis, inflation slipped 0.2%, less than analysts’ call for a 0.3% decrease.

Part of the big increase was fuelled by a temporary two-month GST/HST sales tax holiday introduced back in mid-December 2024. This lowered the prices at restaurants and on alcohol, toys, games, children’s clothing, and some grocery items.

Fast forward a year and those discounts have been priced out of the annual comparison, sending inflation higher. For example, the annual price of the average restaurant meal was up 8.5% compared to a 3.3% increase in November.

Grocery items and confectionary goods were also part of the late 2024 tax holiday and saw price increases as well. For example, coffee saw prices surge 30.8% and fresh and frozen beef soared 16.8%.

Other price increases included alcohol purchased from stores (+5.6%), children’s clothing (4.8%), confectionary (14.2%), snack products (7.9%), and toys and hobby supplies (+7.5%).

It’s not all bad news, though: the price of gasoline was down 13.8%.

Inflationary data is an important metric for investors to pay attention to ,because it’s what the Bank of Canada looks at when determining what it should do regarding interest rates. The central bank will make its first interest-rate decision of 2026 on Wednesday, January 28.

Almost all of the main measures in December’s inflationary reading are now near 2.5%, which is close to the Bank of Canada’s inflation target of 2.0%.

What Will the Bank of Canada Do with Interest Rates in 2026–2031?

Back in December, the Bank of Canada held its key lending rate, which directly impacts interest rates at 2.25%. According to the central bank, it was “about the right level to keep inflation close to two percent while helping the economy through this period of structural adjustment.”

What this means is that, despite a trade war with the U.S., the Bank of Canada believes inflation is pretty much under control; as a result, money markets expect interest rates to hold steady at 2.25% in 2026.

Further out, it’s a little more difficult to predict, but TD Economics expects the Bank of Canada to maintain its key lending rate at an average of 2.25% in 2026 and as far out as 2031. Other financial institutions are less optimistic about economic stability and foresee the Bank of Canada raising interest rates to 2.5% by the end of 2026 and 2.75% in 2027.

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