Inflation data may show further decline, partly due to GST break: economists

Article content

Economists expect new data this week to reveal inflation in December, paving the way for the Bank of Canada to continue cutting interest rates.

Article content

Article content

A Reuters poll showed economists expected annual inflation to hit an average of 1.7 percent in December, down from November’s 1.9 percent increase.

But the RBC sees it falling more than that — to 1.5 percent _ due to the federal government’s temporary GST tax holiday, as consumers spent less on a variety of items including food, restaurant meals, liquor and children’s toys.

Article content

“We still have this view that the broader economic climate and current consumer demand is quite weak,” said Claire Fan, an economist at RBC.

RBC expects that to be largely due to slower food price growth, which will offset any increase in energy prices, economists Nathan Janzen and Abbey Xu wrote in a paper on Friday.

“Tuesday’s final consumer price index report for 2024 will be closely watched for further signs of easing underlying price pressures in Canada, but we expect the data to be skewed by the GST holiday that began on Dec. 14,” they wrote.

BMO, meanwhile, sees the CPI headline coming in a touch above the consensus call, at 1.8 percent.

“There is more uncertainty than usual … since the tax change took effect in the middle of the month, so it should take two months to see the full impact, but most of it is likely to come from the front,” said BMO chief economist Doug Porter. On Friday.

Other pressures, such as housing costs, which have been a major contributor to inflation, are also easing, he said.

“The pressure on housing costs is likely to continue to decrease, with the decrease in interest rates on housing. We will also be watching for any signs that the recent depreciation of the Canadian dollar is having an impact, with a special eye on fresh food.”

Article content

Article content

TD sees headline CPI rising to 2 percent due to higher energy prices, and modest acceleration in food and shelter, chief economist James Orlando said in an email. He sees the Bank of Canada’s target inflation rate – which strips out variables – remaining at around 2.6 per cent.

In November, the Bank of Canada’s preferred key inflation measures were held at 2.6 and 2.7 percent.

Even without the effects of the tax break, the analyst said the report would follow in the footsteps of recent data releases to show continued declines.

“The overall backdrop … is really soft, it’s been soft for a long time,” he said.

“That will actually, continue to appear in the inflation data without any near-term fluctuations or disruptions caused by tax changes.”

Retail spending has been boosted during the holiday season thanks in part to the tax holiday, Mlendi added.

The fan is also expecting more positive signs in the December report on how broad inflationary pressures are.

The Bank of Canada has cut key interest rates sharply to ease pressure on the economy, most recently to 3.25 percent, as inflation now stabilizes around the 2 percent target.

Article content

A fan said the central bank is currently more concerned about economic growth than inflation data.

After a big two-point cut last year, he said the central bank is likely to switch to a smaller cut. The fan expects the central bank to cut rates five times in a row this year, starting later this month, until its key rate remains at 2 percent.

“It will be necessary for conditions to start improving,” he said.

However, tariffs from the US could make that difficult, he said.

The tariffs are widely seen as rising prices in the US, and experts say they could put inflationary pressure on Canada as well.

In a December letter to the last inflation report, TD senior economist Leslie Preston wrote that the bank predicts that inflation will rise to 2 per cent at the Bank of Canada in 2025 as prices increase the cost of goods – but not high enough to prevent the central. the bank continues to reduce rates.

Porter acknowledged in a report on Friday that the central bank appears poised to continue cutting, despite the potential tax implications.

“While the debate in the US is about how much inflation taxes are, the only question in Canada is how much damage they will do to growth,” he said.

“We continue to believe that the bank’s appropriate response to US tariffs will be to cut early, and cut often.”

This Canadian Press report was first published on January 19, 2025.

Article content