How the GST holiday distorted Canada's food inflation story
The latest food inflation data, released this week, was nothing short of startling. From November to December, Canada’s food inflation rate plummeted from 2.8% to 0.6% — an unprecedented monthly decline. This marks a historical record, surpassing the previous drop of 1.9% in March 2012. What makes December’s numbers even more surprising is that the food industry typically sees inflationary pressures peak during the winter months, especially in November, December, February, and March. For the busiest month of the year, a decline of -2.2% is highly unusual and largely attributed to the GST Holiday, which began on December 14.
The GST Holiday has, without question, delivered relief for consumers. However, it also highlights the complex relationship between tax policy and inflation metrics. According to Statistics Canada, the Consumer Price Index (CPI) reflects the final prices paid by consumers, including GST, PST, or HST, as well as environmental, liquor, and tobacco taxes where applicable. When taxes like GST are reduced, it directly impacts the CPI. This is exactly what we saw in December, and similar trends are expected in January and February.
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The data from Statistics Canada reveals a strong correlation between lower food inflation rates at restaurants and the extent of tax relief provided during the GST Holiday. Provinces offering the most significant reductions, such as Nova Scotia, Newfoundland and Labrador, and Prince Edward Island—where GST was cut by 15%—experienced the steepest declines in restaurant inflation at -3.9%, -4.0%, and -3.0%, respectively. Ontario, with a tax reduction of 13%, also saw a notable drop at -3.0%. These numbers are remarkable.
In contrast, provinces like Alberta, Saskatchewan, and Manitoba, where GST was only reduced by 5%, experienced negligible impacts. Alberta’s restaurant inflation decline was a mere -0.2%. This disparity underscores the direct influence of tax reductions on inflation data. However, it also exposes how these policies can artificially suppress inflation metrics, masking underlying cost dynamics. Base menu prices likely remained unchanged or subtly increased, even as tax-inclusive prices dropped. This “tax illusion” gives the impression of reduced costs without reflecting the actual market conditions.
Statistics Canada’s report is clear: Canadians paid less for food in December. Month-over-month inflation rates fell by -0.3% in retail and -4.5% in restaurants. But this does not mean food became genuinely cheaper. Quite the opposite. The GST Holiday’s impact has created a temporary distortion, masking the true cost trajectory of food and leaving room for “opportunity pricing.”
Some grocers and restaurant operators may have leveraged the tax break to increase their base prices, confident that consumers would focus on lower final bills rather than subtle price hikes. This phenomenon highlights a key concern with temporary fiscal measures: they can obscure real price dynamics and inadvertently encourage strategic pricing adjustments that offset intended benefits.
What December’s data truly reflects is not a straightforward pass-through of tax relief but a complex interplay between reduced taxes and business pricing strategies. This serves as a cautionary tale about the unintended consequences of short-term fiscal policies. While the GST Holiday may have offered consumers some relief, it also underscores the risks of relying on temporary measures to address long-term affordability challenges in the food sector. Real solutions require structural, sustainable approaches that address both inflationary pressures and market dynamics comprehensively.
Looking ahead, consumers should brace themselves for major price hikes in the spring and beyond, as predicted in our annual Canada’s Food Price Report 2025. These increases are expected to reflect ongoing inflationary pressures, supply chain challenges, and market adjustments following the expiration of temporary measures like the GST Holiday.
