December inflation slows to 1.8% year-over-year, aided by a GST/HST break. Explore CPI trends, tariffs, and Bank of Canada decisions

THUNDER BAY – BUSINESS NEWS – Canada’s inflation rate experienced a modest deceleration in December 2024, with the Consumer Price Index (CPI) rising by 1.8% year-over-year, down from the 1.9% increase in November. A significant contributor to this slowdown was a temporary GST/HST exemption, introduced on December 14, which reduced prices for certain goods and services, including food, alcoholic beverages, recreational cannabis, clothing, and reading materials.

This temporary tax exemption, coupled with moderating shelter costs and slowing mortgage interest rates, has influenced the inflation outlook for both consumers and policymakers.

Key CPI Highlights:

• Food and Beverages: Canadians paid 1.6% less year-over-year for food purchased from restaurants, marking the first annual decline for this category. Alcoholic beverages bought in stores saw a 1.3% price drop, significantly reversing trends from November’s 1.9% increase.
• Recreational and Children’s Goods: Prices for toys, games (excluding video games), and hobby supplies fell by 7.2%, while children’s clothing dropped by a dramatic 10.6% year-over-year.
• Shelter Costs: Rent prices rose 7.1% year-over-year in December, a slight deceleration from November’s 7.7% increase. Shelter costs overall grew at a slower pace of 4.5%. Mortgage interest rates, while still high, recorded an 11.7% year-over-year rise, the smallest increase since October 2022.
• Gasoline and Travel Services: Gasoline prices increased due to base-year effects, while consumers paid more for travel services during the holiday season.

Temporary GST/HST Exemption: A Decisive Factor

The GST/HST exemption, implemented for goods such as food, alcoholic beverages, recreational cannabis, clothing, and education materials, covered roughly 10% of the CPI basket. The exemption contributed to significant price declines:

• Food from restaurants: Monthly prices dropped 4.5%, the largest recorded decline for this category.
• Alcoholic beverages in stores: Monthly prices fell by 4.1%, nearly tripling the previous largest drop recorded in December 2005.

While the tax break lowered prices temporarily, analysts expect inflation to adjust upward once the exemption ends in early 2025.

Bank of Canada’s Inflation Outlook

Core inflation, which excludes food and energy, continues to fluctuate. The Bank of Canada’s preferred inflation measures averaged 2.55% year-over-year in December. However, the three-month trimmed-mean and median inflation averages exceeded 3.0%, signaling persistent inflationary pressures.

In response to moderating inflation, the Bank of Canada is widely expected to reduce the overnight rate by 25 basis points to 3.0% during its next decision on January 29, 2025.

Potential Impacts of Proposed US Tariffs

The looming specter of 25% tariffs on Canadian goods, as proposed by the Trump administration, poses a significant threat to Canada’s economy.

Although a full implementation by February 1, 2025 appears unlikely, such tariffs would strain trade relations and exacerbate inflationary pressures.

Key Risks:

• Inflation Spike: Tariffs could cause short-term inflation by raising import costs for consumers and businesses.
• Economic Slowdown: The long-term impact would likely include business layoffs, decreased consumer spending, and heightened unemployment rates.
• Bank of Canada Policy: While initial inflationary effects might prompt rate hikes, the central bank’s primary concern would shift to preventing a recession.

Bottom Line: Opportunities for Thunder Bay Businesses

For businesses in Thunder Bay, the temporary tax exemptions offer a short-term advantage to consumers, encouraging spending on goods like clothing, toys, and food. Local businesses should capitalize on the lower prices to drive sales while preparing for potential shifts in consumer behavior once the tax break ends.

Additionally, businesses reliant on US exports should monitor tariff developments closely and consider diversifying trade partnerships to mitigate risks.

The inflation report for December highlights the interconnectedness of global trade, fiscal policy, and consumer behavior, leaving businesses and policymakers to navigate an evolving economic landscape.