Economists expect inflation held steady in December despite 'tax holiday' disruption
Economists will be sorting through plenty of noise in the annual inflation figures when Statistics Canada releases fresh price data for December on Monday.
A Reuters survey of economists expects the annual inflation rate held steady at 2.2 per cent in December, according to LSEG Data & Analytics.
Economists at RBC are among those calling for inflation to be unchanged in December.
An estimated eight per cent drop in the price of gasoline last month is expected to offset stickiness in food inflation, assistant chief economist Nathan Janzen wrote in a note to clients Friday.
BMO managing director of Canadian rates and macro strategist Benjamin Reitzes said he expects inflation ticked up to 2.3 per cent in December despite the heavy drop in gasoline prices.
Reitzes said the end of the year is usually a season for discounts but prices dropped more sharply in December 2024 when the federal government's temporary "tax holiday" took effect mid-month.
READ: How Canadian consumers are adapting in an uncertain economy: NielsenIQ
The Liberal government's move to eliminate the GST on some products led to temporarily lower prices on certain groceries, dining out and a variety of household goods and common gifts.
"From a year-ago level we are expecting to see a notable acceleration in grocery prices," Reitzes said, adding that recent producer price trends suggest food inflation will keep accelerating in the months ahead.
READ: Food prices expected to continue to climb again this year
RBC expects overall food inflation will top five per cent in December, up from 4.2 per cent in November, as the whipsaw from GST-free restaurant meals in the previous year pushes the consumer price index higher.
Janzen warned that year-ago tax changes will be distorting the annual inflation figures for many months to come.
The unwinding of the two-month tax holiday will affect the inflation figures through to March, while the removal of the consumer carbon price in April 2025 will drive the headline inflation figure higher for the same month in 2026.
Reitzes said the December inflation figures are "unlikely" to shift the Bank of Canada from the sidelines at its first interest rate decision of the year on Jan. 28.
Governor Tiff Macklem said after the Bank of Canada's decision to leave its benchmark interest rate unchanged at 2.25 per cent in December that the central bank expects monetary policy is at about the right level to support the economy and tamp down inflation.
Janzen sees the central bank remaining on hold until 2027, at which point RBC economists expect rates to move higher.
Monday will also see the Bank of Canada release its quarterly surveys of businesses and consumers.
Janzen said he expects the updated surveys will show a similar picture to the third-quarter results that showed the economy was stabilizing underneath the pressure of U.S. tariffs.
"We expect to see more of the same in Q4 with muted demand, cautious pricing behaviour, and restrained hiring plans," he said.
Reitzes said he'd be looking for signs that businesses are adapting to the ongoing uncertainty, but he doesn't expect much improvement in business confidence until there's more clarity on the trade front.
