Economists predict a drop in inflation rates, influenced by a temporary GST tax holiday and weak consumer demand
Toronto: So, it looks like inflation is slowing down a bit. Economists are saying that the new data coming out this week will show a drop in inflation for December. This could mean the Bank of Canada might keep cutting interest rates.
According to a Reuters poll, they expect the annual inflation rate to be around 1.7% for December, down from 1.9% in November. RBC is even more optimistic, predicting it could fall to 1.5% thanks to the GST tax holiday. This holiday has made people spend less on things like food and toys.
Claire Fan, an economist at RBC, mentioned that the overall economic situation is pretty weak. Slower food price growth is helping to balance out any increases in energy prices. The final consumer price index report for 2024 is going to be closely watched, especially since the GST holiday started on December 14.
BMO thinks the inflation rate might be a bit higher, around 1.8%. Doug Porter, their chief economist, noted that the tax change took effect mid-month, so it might take a couple of months to see the full impact.
He also pointed out that shelter costs, which have been a big part of rising inflation, are starting to ease. It seems like mortgage interest costs are slowing down too. They’re keeping an eye on how the Canadian dollar’s recent drop might affect fresh food prices.
TD is predicting a rise to 2% in inflation due to higher energy prices and a slight increase in food and shelter costs. They expect the Bank of Canada’s core inflation rates to stay around 2.6%.
Even without the GST break, Fan believes the report will show a downward trend in inflation. She said the overall economic backdrop has been softening for a while now.
Retail spending picked up during the holidays, partly thanks to the tax holiday. Fan is hopeful that the December report will show more positive signs regarding inflationary pressures.
The Bank of Canada has been cutting interest rates to help the economy, recently lowering it to 3.25% as inflation stabilizes around the 2% target. Fan thinks the central bank is more focused on economic growth than inflation data right now.
After making some larger cuts last year, she expects smaller cuts moving forward, predicting five cuts this year until the rate hits 2%. She believes this is necessary for improvement.
However, potential tariffs from the U.S. could complicate things. These tariffs are expected to raise costs in the U.S., which could also affect inflation in Canada.
In a December note, TD’s Leslie Preston mentioned that they expect inflation to rise above the Bank of Canada’s target in 2025 due to tariffs, but not enough to stop rate cuts.
Porter agrees that the central bank seems ready to keep cutting rates, despite the potential impact of tariffs. He believes the best response to U.S. tariffs is to cut rates early and often.
This report was first published by The Canadian Press on January 19, 2025.
Rosa Saba, The Canadian Press
