Canada's annual inflation rate decreased to 1.8% in December 2024, following a rise of 1.9% the previous month, according to Statistics Canada. The decline was significantly influenced by a temporary Goods and Services Tax (GST) break introduced on December 14, which brought down prices for items like restaurant meals, alcohol, and children's toys.
The GST tax exemption affected roughly 10% of the consumer price index (CPI) basket, leading to noticeable decreases. For example, the cost of food purchased from restaurants fell by 1.6% year-over-year, marking the first recorded decline for this category. Similarly, prices for alcoholic beverages dropped by 1.3%, compared to increases of 1.9% and 3.4% for food and alcohol respectively in the preceding months.
Andrew Grantham, senior economist at the Canadian Imperial Bank of Commerce, commented on the impact of the tax break, stating, "Roughly 10% of the inflation basket was affected by the tax exemption, with restaurant, alcohol, and toys & games prices all seeing price declines on the month." He also predicted continued effects from the tax break, noting, "as the tax break came to effect mid-month, a greater impact is expected to be seen in January when prices during the full month will be subject to the lower rate." This temporary relief has sparked speculation surrounding the Bank of Canada's interest rate decisions, particularly as markets predict an 81% chance of a 25-basis-point cut at the bank's upcoming meeting on January 29.
BMO Capital Markets chief economist Douglas Porter echoed similar sentiments about the inflation reading's influence on future monetary policy. "Today’s reading is just good enough to allow the Bank of Canada to trim next week, for risk management purposes," he mentioned. Despite the headline figures showing some improvement, Porter cautioned about underlying economic factors, emphasizing, "the heavy overhang of trade uncertainty – possible U.S. tariffs – overrides almost all else."
On the month-over-month basis, Statistics Canada reported the CPI decreased by 0.4%, alongside notable price drops for categories impacted by the GST break. Restaurant food saw the largest decline of 4.5% on the month. Overall, the annual inflation outlook appears to be stabilizing, maintained below the Bank of Canada's target of 2% since August, but analysts warn of potential volatility due to external pressures.
Core inflation measures, which the Bank of Canada closely tracks for policy decisions, indicated slight easements. The CPI-median increased by 2.4% from 2.6%, the CPI-trim fell to 2.5% from 2.6%, and CPI-common stayed at 2%. Meanwhile, housing costs continued to escalate, growing 4.5% year-over-year, albeit at a slower pace than previous months.
The recent drops coincide with fluctuations within the energy sector, where gasoline prices rose by 3.5% annually due to base-year effects, compared to last December when prices declined. Analysts pointed out the need for caution when predicting sustained decreases, considering the turbulent economic backdrop, including potential trade conflicts with the U.S., which could influence Canada’s economic stability.
"Overall, there are many moving pieces and temporary factors playing out in the inflation data at the moment," Grantham noted, “but underlying price pressures appear to be close to two percent.” While January's data is expected to show continued effects from the GST break, experts urge stakeholders to remain vigilant due to the unpredictable nature of both domestic and international economic influences.
The upcoming interest rate decision from the Bank of Canada will be closely watched as many expect the central bank to respond to the latest inflation data, especially with global economic headwinds at play.
The December inflation report is particularly timely as it serves as the last significant piece of economic information before the January interest rate threshold. Economists anticipate the Bank of Canada will take this opportunity to enact gradual adjustments, facilitated by easing inflation pressures, temporary tax benefits, and the overarching reality of trade uncertainties.