The Canadian dollar weakened on Tuesday after the annual inflation rate shot up in December. The country has been enduring a severe bout of price pressures, concentrated in key components of the economy, like housing and food. Despite a jump in government bond yields, the loonie has failed to keep up.

Last month, the consumer price index (CPI) rose to 3.4%, up from 3.1% in November, according to Statistics Canada. This matched the consensus estimate of 3.4%.

Core inflation, which strips the volatile energy and food industries, eased to 2.6% year-over-year.

On a monthly basis, the CPI and core CPI fell 0.3% and 0.5%, respectively. This was fueled primarily by a drop in gasoline prices.

So, ultimately, it was a case of inflation and deflation.

“If you are looking for data to signal a rate cut is imminent, this isn’t it. December’s inflation report underscores that the last mile of getting inflation all the way back to two per cent is the hardest,” wrote Leslie Preston, a managing director and senior economist at TD, in an analyst note.

The Canadian bond market reacted to the expectation that the Bank of Canada (BoC) could keep interest rates higher for longer. Although investors do not anticipate any additional rate hikes this year, monetary authorities have insisted that they could firm monetary policy if the data warrants higher rates.

The benchmark five- and ten-year bonds rose 11 basis points and 12.5 basis points to 3.39% and 3.36%, respectively.

In other economic data this week, manufacturing and wholesale sales surged 1.2% and 0.9%, respectively, in November.

New motor vehicle sales slipped to 143,720. Housing starts climbed to a higher-than-expected 249,300 in December, up from downwardly revised 210,900.

The USD/CAD currency pair advanced 0.53% to 1.3498, from an opening of 1.3427, at 18:44 GMT on Tuesday. The GBP/CAD dropped 0.28% to 1.7041, from an opening of 1.7088.