Inflation in Canada Eases to 1.8% on Sales Tax Break

For the first time since 2019, Canadian inflation stayed within the central bank’s target range for a full year, a mark of achievement for policymakers ahead of a potential tariff war that threatens to derail their progress.

Author of the article:

Bloomberg News

Randy Thanthong-Knight

Published Jan 21, 2025  •  2 minute read

A shopper walks through a produce aisle at a grocery store in Toronto, Ontario. Photographer: Cole Burston/Bloomberg Photo by Cole Burston /Photographer: Cole Burston/Bloom

(Bloomberg) — For the first time since 2019, Canadian inflation stayed within the central bank’s target range for a full year, a mark of achievement for policymakers ahead of a potential tariff war that threatens to derail their progress.

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The consumer price index ended 2024 with a second consecutive monthly deceleration, rising 1.8% on a yearly basis in December, down from 1.9% previously, Statistics Canada reported Tuesday. The median estimate in a Bloomberg survey of economists was for a 1.9% gain. On an annual average basis, prices increased 2.4% last year, following a 3.9% gain in 2023.

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The deceleration was driven by lower prices for food from restaurants and alcoholic beverages, which are exempted from sales tax from Dec. 14 to Feb. 15. Taking out items impacted by the tax break, which made up about 10% of the CPI basket, the headline index would likely accelerate to 2.3% — still within the bank’s target of 1% to 3%.

On a monthly basis, the index declined 0.4%, matching economists’ expectations.

The Canadian economy is facing considerable uncertainty, however, as US President Donald Trump has signaled plans to impose tariffs of as much as 25% on Canada by Feb. 1 and Prime Minister Justin Trudeau’s government has vowed to retaliate.

A trade war would likely force the Bank of Canada to adjust their rate-cut campaign to brace the economy for the impact on consumer prices. Governor Tiff Macklem has said he wants to strengthen economic growth, which has been weaker than expected.

The central bank next sets the benchmark overnight rate on Jan. 29, when it will also update economic forecasts. The majority of economists in a Bloomberg survey expect policymakers to slow down the pace of easing, shifting back to a regular 25 basis-point cut next week after reducing borrowing costs aggressively in the final quarter of last year.

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The Bank of Canada’s two preferred core inflation measures decelerated, averaging a 2.45% yearly pace in December, versus 2.6% previously.

Excluding gasoline, the index rose 1.8%, following a 2% gain in November. Excluding shelter, the index was up 0.7% last month, versus 0.8% previously.

Regionally, inflation decelerated in the Atlantic provinces and Ontario, partly driven by lower prices for restaurant food, while Alberta saw slower rent price growth contributing to the deceleration.

Trudeau’s government unveiled the federal sales tax holiday in November in an effort to woo back voters who are frustrated by cost-of-living concerns. It estimated the cost of the removal of the goods and services tax on certain items would be C$1.6 billion ($1.1 billion).

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