Canada’s Slowing Inflation Is An Illusion Involving A Tax Holiday

Canada's recent dip in inflation rates may not be as promising as it appears. In December, the annual inflation rate decreased to 1.8% from November's 1.9%, largely due to a temporary sales tax break. This measure, effective from December 14, 2024, to February 15, 2025, waives the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) on select essential items, including food, children's clothing, and certain recreational goods.

The tax holiday was introduced to provide Canadians with relief from rising living costs. However, this temporary measure has led to a decrease in the Consumer Price Index (CPI), creating an impression of slowing inflation. Since the CPI accounts for sales taxes in its calculations, the removal of GST and HST on specific items has artificially lowered the index.

Notably, provinces like Ontario and those in the Atlantic region, which implement the HST—a combination of federal and provincial sales taxes—have seen price reductions of up to 15% on affected goods. This significant decrease has contributed to the overall drop in the national CPI.

It's important to recognize that this decline in inflation is temporary. The tax holiday only impacted the latter half of December, but its full effect will be evident throughout January. As the tax relief concludes in mid-February, prices are expected to rebound, potentially leading to a noticeable increase in the CPI for March, which will be reported in April.

Economists caution that the current slowdown in inflation may be misleading. Douglas Porter, chief economist at BMO, expressed surprise at the recent data, noting a lack of discussion on the upward trend in core inflation. He emphasized that the GST/HST holiday temporarily suppresses inflation, but this effect will reverse once the tax break ends.

In summary, while the recent decrease in Canada's inflation rate offers temporary relief, it is primarily due to the short-term tax holiday. As this measure expires, Canadians should be prepared for a potential resurgence in inflation rates in the coming months.