TORONTO – A number of goods have been exempted from the federal sales tax from December 14 to February 15, promoted by former Prime Minister Justin Trudeau. An initiative that, now, could have consequences on prices and inflation. According to some economists interviewed by Reuters, in fact, that the annual rate of purchases will rise to 2.2% (in February, the figure for which will be released tomorrow by Statistics Canada), compared to 1.9 percent in January.
Benjamin Reitzes, general manager of Canadian tariffs and strategy at BMO, says that the suspension of taxes will have a seesaw effect on inflation. “That helped pull prices down in December and January and now, it’s going to do the exact opposite in February and March” Reitzes said, as reported by The Canadian Press. Both BMO and TD expect inflation to accelerate to 2.2% in February, while RBC expects a much faster pace (2.5%), with economists Nathan Janzen and Carrie Freestone concluding in a report that the end of the tax holiday has likely boosted price growth.
And there is a new unknown going forward: the tariff war with the United States. February inflation data will not reflect the direct impact of the Canada-U.S. tariff war, which began only in early March. The sustained tariffs risk reigniting inflation, TD economist Maria Solovieva wrote in a report, thus threatening the success of the “hard-won” battle that the Bank of Canada has waged to bring inflation back to its 2% target. “This limits how far the BoC (Bank of Canada) can cut rates to support demand” she said.
Then, there is the problem of the Canadian dollar becoming weaker against the U.S. dollar: the weak “loonie” will continue to push up the prices of goods imported from the United States in February, according to Reitzes.
Meanwhile, the Bank of Canada cut its seventh consecutive interest rate (now at 2.75%) last week, while also warning of a looming blow to the Canadian economy and a possible spike in inflation due to the trade war. The Bank of Canada’s next interest rate decision is scheduled for April 16.
