Featured Research

Between mid-December 2024 and mid-February 2025, the Canadian government implemented a GST/HST tax holiday, exempting beverages, restaurants, children’s clothing and footwear, children’s diapers, children car seats, children’s toys, jigsaw puzzles, video games consoles, physical books and printed newspapers, Christmas decorations. Note that food items are not included since many fresh foods are already exempt from GST/HST. This policy was largely anticipated to push Headline and Core inflation down. Although Core CPI excludes food and indirect tax effects, we anticipated strategic repricing by firms, capitalizing on artificially low prices during the holiday. As a result, for January CPI YoY, we applied a -0.34% downward adjustment, estimating 1.95%, closely aligning with the realized CPI of 1.9%. Similarly, Core CPI YoY was adjusted by -0.13%, ensuring consistency with observed inflation trends. However, median inflation undershot expectations, primarily due to unexpected services repricing, which drove the median estimate across subcomponents.

Given these insights, we are refining our strategy for February 2025. The expiration of the GST tax break in mid-February will lead to price increases roughly proportional to GST/HST rates, disproportionately affecting certain consumer categories. While prices for all tax-exempt items fell during the holiday, the seasonally adjusted MoM weighted distribution of inflation across the 55 components in Median Core CPI (Figure 1) reveals distinct patterns. Food and beverage prices saw steep discounts, while clothing and footwear prices saw a slight increased MoM from December 2024, indicating preemptive price adjustments by firms ahead of the tax change. Compared to the previous year, the decline in food exceeded the decline in clothing, lending evidence of concurrent price increases in clothing (Figure 2). As a result, the reintroduction of the GST will have uneven effects across categories.

Since food prices were artificially reduced, they will experience higher base effects, leading to a stronger rebound in post-GST reinstatement. In contrast, clothing and other durable goods have already seen price increases, muting the tax adjustment’s impact on these items. With firms having selectively adjusted prices, we do not expect a full reversal of prior price declines across all categories. Instead, the bulk of the inflationary impact will likely fall on food, while durable goods remain relatively stable.

Given these dynamics, we are comfortable applying an additional 0.3% adjustment on top of our baseline estimate, which includes seasonality, energy costs, and other items — aligning with expected post-GST price normalization. For Core CPI, we are taking a more cautious approach, given its exclusion of food, which represents much of the anticipated price increase. However, recognizing some pass-through effects in restaurant services, we are applying a 0.10% upward adjustment. Finally, for Median Core CPI, given its role in limiting the influence of volatile price changes and the fact that tax-affected items remain far from the median subcomponent, we have decided not to make any adjustments for this indicator.

Figure 1

Figure 2