Inflation data likely to show further slowing, partly due to GST break: economists

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

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A Reuters poll shows economists expect the annual inflation rate to come in at an average of 1.7 per cent for December, down from November’s 1.9 per cent rise.

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

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“We still have this view that the broader macroeconomic backdrop and current consumer demand is just pretty weak,” said Claire Fan, an economist at RBC.

RBC expects that’s largely driven by slower food price growth, which will offset any rise in energy prices, economists Nathan Janzen and Abbey Xu wrote in a note Friday.

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

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

“There’s a bit more uncertainty than usual … as the tax change took effect mid-month, so it should take two months to see the full impact, but it’s possible most of it comes up front,” said BMO chief economist Doug Porter in note Friday.

Other pressures, such as shelter costs, which have been a consistent large contributor to rising inflation, are also easing, he said.

“Shelter cost momentum looks to continue ebbing, with slowing gains in mortgage interest costs. We’ll also be watching for any signs that the recent depreciation in the Canadian dollar is having an impact, with a particular eye on fresh food.”

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TD sees headline CPI rising to two per cent thanks to higher energy prices, as well as a modest acceleration in food and shelter, said senior economist James Orlando in an email. He sees the average of the Bank of Canada’s preferred core inflation rates — which strip out volatile items — remaining around 2.6 per cent.

In November, the Bank of Canada’s preferred core measures of inflation held steady at 2.6 and 2.7 per cent.

Even without the effects of the tax break, Fan said the report will follow in the footsteps of recent data releases to show a continued downward trend.

“The overall backdrop … it’s pretty soft, it has been softening for quite a bit already,” she said.

“That’s really going to show up, continue to show up in inflation data regardless of some of the near-term fluctuation or disruptions caused by the tax changes.”

Retail spending strengthened over the holidays thanks in part to the tax holiday, added Fan.

Fan also expects more positive signs in the December report of how broad inflationary pressures are.

The Bank of Canada has been cutting its key interest rate aggressively to ease the pressure on the economy, most recently to 3.25 per cent, now that inflation is stabilizing around its two per cent target.

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Fan said the central bank at this point is more concerned about economic growth than the inflation data.

After two larger half-point reductions last year, she said the central bank will likely pivot to smaller cuts. Fan expects the central bank to cut five times in a row this year, beginning later this month, until its key rate sits at two per cent.

“It’s going to be required for conditions to start improving,” she said.

However, potential tariffs from the U.S. could complicate that, she said.

Tariffs are widely considered to be inflationary for the U.S., and experts have said they could in turn put inflationary pressure on Canada as well.

In a December note on the last inflation report, TD senior economist Leslie Preston wrote that the bank forecasts headline inflation to rise somewhat above the Bank of Canada’s two per cent target in 2025 as tariffs raise goods costs — but not high enough to dissuade the central bank from continuing to cut rates.

Porter agreed in a report Friday that the central bank appears poised to continue cutting, despite potential effects of tariffs.

“While the debate in the U.S. is all about how much inflation tariffs may cause, the only question in Canada is how much growth damage they will inflict,” he said.

“We continue to believe that the correct response by the bank to U.S. tariffs would be to cut early, and cut often.”

This report by The Canadian Press was first published Jan. 19, 2025.

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