Canada’s tax holiday ran for two months but it probably felt much shorter, and with good reason. Statistics Canada (Stat Can) data shows the Consumer Price Index (CPI) accelerated in January. The central bank’s preferred inflation measures are now approaching the upper bound, and will bust through it like the Kool-Aid Man once the temporary suppression from the GST/HST Holiday fades. At least one Big Six bank told investors the central bank is likely to pause rate cuts in the coming months, as CPI is set to rip in just a few weeks.
Canadian Headline Inflation Accelerates As Cheap Energy Disappears
Canadian headline inflation advanced but remained below that crucial 2-point mark the public watches. Annual growth of CPI climbed to 1.9% in January, accelerating 0.1 points from a month prior. Stat Can emphasized that volatile energy prices were behind much of the growth, and stripping gas prices reduces the rate to just 1.7% over the same month.
Before dismissing headline growth, it’s worth realizing that gas prices provided much of the downward pressure in prior months. The negative growth wasn’t emphasized when it suppressed inflation, but becomes a point when dismissing rising inflation. Just a fun observation of how reporting this data seems to work. That volatility is largely why the Bank of Canada (BoC) typically prefers Core measures of CPI.
Bank of Canada-Preferred Inflation Measure Near Upper Limit
The less volatile, BoC-preferred Core CPI measures all accelerated last month. “…there is little debate that underlying inflation is no longer improving in Canada, and in fact seems to be grinding a bit higher recently,” explained BMO Chief Economist Douglas Porter.
Source: BMO Capital Markets; Bank of Canada; Statistics Canada.
The above chart provided by the bank shows the four major measures of the Core CPI index. He emphasized that the most recent 6-month trend shows a sharp acceleration in contrast to the previous six.
“In fact, the Bank of Canada’s two main measures of core are each up at a 3%+ annual rate over that spell. Both are running at the strongest pace in a year, i.e. back when overnight rates were still 5.0%, not 3.0%,” said Porter.
Adding, “While the Bank obviously has a lot to deal with amid the many tariff threats, the inflation backdrop alone would suggest it may be time for at least a brief pause.”
GST/HST Holiday Concealing Inflation, Prices Set To Soar In March
The issue with accelerating inflation gets even more concerning when considering temporary tax relief. In mid-December, Canada sent households on a GST/HST Holiday, exempting certain categories from the sales taxes. Since CPI prices are inclusive of sales taxes, this temporarily lowers prices for those segments. As we mentioned last month, since January is the first full month of the relief, the impact would be amplified in this report. However, the effect would fade by next month’s release, as the temporary suppression is reversed.
Another economist at the Big Six bank wrote to investors separately, confirming the issue. “This relief will start fading in February before fully coming off the books in March,” said Shelly Kaushik, a senior economist at BMO Capital Markets.
Source: BMO Capital Markets; Statistics Canada.
She warns that headline inflation will pop above 2% in the coming months, and move potentially higher than pre-holiday. “If, as some anecdotal evidence suggests, some businesses raised prices while their items were exempt from sales tax, prices could rise above their pre-holiday levels,” Kaushik noted.
Considering the BoC’s policy research shows each rate decision takes 18 to 24 months to be fully reflected at market, this can complicate their position. Looming tariffs are likely to require some easing, but with inflation already warming up before temporary suppressions fade, the last policy cut may have already pushed CPI into the danger zone.