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

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Economists expect new data this week to 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 showed that economists expect annual inflation to average 1.7 percent for December, down from a high of 1.9 percent in November.

But RBC sees it falling even further – to 1.5 per cent – thanks to the federal government’s temporary tax break for the GST, as consumers spent less on a variety of items including food, restaurant meals, alcohol and toys.

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“We still have a view that the broader macroeconomic backdrop and current consumer demand are very weak,” said RBC economist Claire Vann.

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

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

Meanwhile, BMO sees headline CPI coming in at a touch higher than the consensus forecast of 1.8 per cent.

“There is more uncertainty than usual… with the tax change taking effect mid-month, so it should take a couple of months to see the full impact, but it could come,” Doug Porter, chief economist at BMO, said in a note. Most of it is up front.” Friday.

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

“Shelter cost momentum looks set to continue to ease, with gains in mortgage interest costs slowing. We will also be watching for any signs that the recent decline in the value of the Canadian dollar is having an impact, with a particular focus on fresh food.

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TD expects the headline CPI to rise to 2 percent thanks to higher energy prices, as well as a modest acceleration in food and shelter, chief economist James Orlando said in an email. He sees the Bank of Canada’s preferred average core inflation rates – which exclude volatile elements – remaining at around 2.6 per cent.

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

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

“The overall background…it’s very soft, and it’s been getting softer for some time already,” she said.

“This will indeed show up, and will continue to show up in inflation data regardless of some near-term volatility or disruption caused by tax changes.”

Fan added that retail spending boosted during the holidays thanks in part to the tax holiday.

Fan also expects more positive signs in the December report on the extent to which inflationary pressures are widening.

The Bank of Canada has aggressively cut its key interest rate to ease pressure on the economy, most recently to 3.25 per cent, now that inflation has stabilized around its 2 per cent target.

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Fan said that at this stage the central bank is more interested in economic growth than inflation data.

After two larger half-point cuts last year, she said the central bank was likely to focus on smaller cuts. Fan expects the central bank to cut rates five times in a row this year, starting later this month, until the key interest rate reaches 2 percent.

“It will be necessary for conditions to start improving,” she added.

However, she said potential tariffs from the United States could complicate that.

Tariffs are widely considered inflationary for the United States, and experts said they could in turn put inflationary pressure on Canada as well.

In a December note on the latest inflation report, TD chief economist Leslie Preston wrote that the bank expects headline inflation to rise somewhat above the Bank of Canada’s 2 per cent target in 2025 as tariffs push up commodity costs — but not high enough. To discourage the Canadian Central Bank from doing so. The bank continues to lower interest rates.

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

“While the debate in the United States is about how much inflation tariffs might cause, the only question in Canada is how much damage they will do to growth,” he said.

“We continue to believe that the correct response by the Bank to US tariffs will be to cut early, and cut often.”

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

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