GST Break Helps Keep Inflation Below Target in January

With the two-month GST/HST holiday in full effect in January, headline CPI inflation held closer to the Bank of Canada’s 2% target than it would have otherwise. Indeed, our estimate suggests it would have come in at more than 2.5% y/y to start 2025 if not for the federal tax measure. Food purchased from restaurants contributed the most to the deceleration (-3.1%), causing food CPI inflation to drop 0.6% from a year earlier, after posting advances of 0.6% in December and 2.8% in November (graph 1). In contrast, the CPI excluding food rose 2.4% in January over a year earlier, up from 2.1% in December. Other CPI categories that posted notable declines for the second consecutive month because of the GST/HST holiday included alcohol purchased from stores (-3.6%); prices for toys, games (excluding video games) and hobby supplies (-6.8%); and children’s clothing (-3.7%). This drag helped to offset a further reacceleration in energy prices (up 5.3%, from 1.0% in December) and other non-energy or food inflation categories, such as prices for new passenger vehicles (2.3%).

While the sales tax holiday helped to push the price of goods excluding food and energy lower again in January (-0.4% y/y), services price growth also slowed in the month to its most sluggish pace since August 2021 (2.8%). Shelter inflation continues to make by far the largest contribution to headline inflation (graph 2), but slowed for the tenth consecutive month to 4.5%. While the rented accommodation CPI advanced by 6.0%, it’s the slowest advance since July 2023, and our research External link. suggests it should slow steadily going forward. At the same time, the weightier owned accommodation inflation slowed to 4.2%—a pace not seen since May 2021—thanks to the sustained slowdown in mortgage interest cost (10.2%) and drag from homeowners’ replacement cost (0.0%).

Looking to underlying inflation, the Bank of Canada’s preferred measures of core year-over-year price growth—CPI median and trimmed mean—accelerated slightly in January (averaging 2.7% y/y). However, revisions to more recent data explain much of the upside surprise to the year-over-year readings. In contrast, the annualized 3‑month moving average of these seasonally adjusted series edged lower in January to an average of 3.0%—the slowest pace since September 2024—albeit remaining at or above the top end of the Bank of Canada’s operating band for inflation for the fourth consecutive month (graph 3). Other measures of underlying inflation were more mixed.

While headline CPI inflation staying close to the Bank of Canada’s 2% target was a positive in January, that was again muddied by the GST/HST holiday that started the prior month. This distortion in the price data will start to reverse in February and will be entirely in the rearview mirror starting in March (see our analysis External link. on the inflation implications). At the same time that inflation is coming in around the Bank’s target, we’re tracking Q4 real GDP growth that is at or slightly above the BoC’s latest forecast. As such, we’re of the view that the Bank of Canada will likely take a pause on rate cuts in March. But ongoing tariff threats from President Donald Trump mean downside risks to the economy remain External link., making the timing and pace of future rate cuts highly uncertain.