Economic experts are predicting a minimal, if any, fluctuation in Canada’s inflation numbers when the data for January is released this week. However, a clear understanding of the shifts in costs may be obscured due to the government’s Goods and Services Tax (GST) holiday for the entire month.
The consumer price index for January 2025, measured by Statistics Canada, is due to be announced on Tuesday. In December, the annual inflation rate of Canada decreased to 1.8%, primarily due to the federal government’s halt on sales tax for a wide range of items leading up to the Christmas holidays. The decrease was notably influenced by purchases of restaurant food and alcohol from stores, both of which were exempted from GST starting December 14.
However, if the tax break had not been implemented, Statistics Canada projected that inflation would have increased to 2.2% from 1.9%.
BMO’s chief economist Doug Porter suggests that even excluding the unique factor of the tax break, inflation is nearly 2%, perhaps even slightly higher. He anticipates that the inflation rate will remain stable.
“We are in a much better position than we were a year ago, or even two or three years ago when inflation was soaring,” he said. Nathan Janzen, RBC’s assistant chief economist, also predicts a decrease in inflation to 1.7%, primarily due to the temporary tax break.
Janzen noted that the tax break will continue to obscure inflation readings until March when a clearer understanding of the consumer price index, free of distortions, can be obtained. He added, “Nevertheless, the Bank of Canada will concentrate on their preferred ‘core’ measures, which exclude the impact of indirect taxes, for indications on how underlying inflation trends are shaping up.”
In December, the growth in grocery prices slowed down compared to the previous month, falling to 1.9% year-over-year, while gas prices increased to 3.5%.
The cost of shelter remains high, although it dropped slightly in December to 4.5%, and rent prices increased by 7.1% compared to the same month the previous year.
Ahead of its decision to reduce its interest rate to three percent on January 29, members of the Bank of Canada’s governing council expressed optimism about recent indicators showing economic growth and steady inflation around its two percent target.
Porter mentioned that the central bank’s most significant consideration for another rate cut would be the potential trade war with the United States. The next rate decision is scheduled for March 12. He concluded, “The widespread assumption is that the bank will continue to slightly reduce rates, which would place them roughly in the middle of what I would consider the bank would feel would be neutral. I see 2.5% as being pretty close to neutral for the Bank of Canada, and I would assert we’re not quite there yet at three percent.”
