Canada's inflation rate fell to 1.8% in December, with prices declining during GST break

Canada's inflation rate fell to 1.8 per cent in December, with the federal government's GST holiday bringing prices down for restaurant food, alcohol and children's clothing, Statistics Canada said Tuesday.

The rate was a tick lower than analyst expectations, and lower than the previous month's 1.9 per cent. With food excluded, December's inflation rate came in at 2.1 per cent.

On a annual basis, prices for alcoholic beverages purchased from stores declined 1.3 per cent in December, compared with a 1.9 per cent increase in November, and food purchased at restaurants dropped by 1.6 per cent in December from a rise of 3.4 per cent the previous month.

The prices included in the Consumer Price Index include all excise and other taxes paid by consumers, and as a result any tax break brings down the prices recorded by Statistics Canada.

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, the agency said.

Housing prices still rose in December by 4.5 per cent, but at a slightly slower pace than the previous month's 4.6 per cent rate. Gas prices rose 3.5 per cent due to what's referred to as a base-year effect.

The consistent easing of prices, which has stayed at or below the Bank of Canada's target of two per cent since August, has helped the bank to slash its key policy rate by a total of 175 basis points from June to 3.25 per cent.

A further drop in inflation in December could prompt the central bank to cut rates again next week, although Bank of Canada Governor Tiff Macklem had said last month that further rate cuts would be gradual.

The central bank's preferred measures of core inflation, CPI-median and CPI-trim, also edged down.