Food inflation expected to jump in January amid tax changes: economists

A customer shops in a new "small format" No Frills grocery store that the grocery chain is testing, in Toronto, Thursday, May 30, 2024. THE CANADIAN PRESS/Chris Young

OTTAWA — Economists expect tax changes from a year ago will result in a year-over-year surge in food prices when Statistics Canada reports January inflation figures later this week.

StatCan will publish its January consumer price index report on Tuesday, a day later than originally scheduled.

The agency recently adopted a Monday publishing schedule for the consumer price index but shifted the January release to account for a regional holiday in eight provinces.

A Reuters poll of economists expects the annual rate of inflation held steady at 2.4 per cent in January, according to LSEG Data & Analytics.

Some economists think the headline inflation figure will accelerate.

RBC assistant chief economist Nathan Janzen said in a note Friday that he thinks tax-related disruptions will push the annual inflation rate up to 2.6 per cent in January.

Starting mid-December 2024, the Liberal government waived the federal portion of the sales tax on dining out and a variety of common household goods and some grocery items for two months.

With January 2025 marking the only full calendar month benefiting from the tax change, January 2026 will see higher prices in comparison for restaurant meals and some grocery items, Janzen explained.

“Food price growth could spike above (seven per cent), driven by rising restaurant costs compared to tax-exempt levels a year ago,” he said in the note.

Desjardins also expects distortions from the tax holiday will drive inflation a tick higher to 2.5 per cent in January.

Randall Bartlett, Desjardins’ deputy chief economist, said that while January’s food inflation will be largely tied to mechanical tax changes, that’s not the whole story.

Rising costs for grocery staples such as coffee and beef are also driving movement in food inflation, he said.

Bartlett cited a report from the Bank of Canada earlier this month that pinned much of the blame for rising grocery prices on higher import costs, in part fuelled by a weaker Canadian dollar earlier this year.

He said the U.S. trade disruption is driving up costs across Canada’s food supply chain, and that’s being felt in grocery aisles.

“Ultimately, uncertainty and change that’s driven by policy often ends up costing consumers more. And we’re seeing that in the food inflation numbers,” Bartlett said.

Ongoing relief from the end of the consumer carbon price last April, meanwhile, will continue to take some steam out of gasoline costs and the overall inflation figures, Janzen said in his note.

Economists at Capital Economics said in a note previewing Tuesday’s inflation data that softness in shelter costs should also help keep a lid on January CPI.

New home price growth has been weak in recent months and the Bank of Canada’s interest rate cuts from the past year should feed into lower mortgage interest costs, Capital Economics noted.

The Bank of Canada will get one more look at inflation data for February after this week’s release before making its next interest rate decision on March 18.

The central bank held its benchmark interest rate steady at its first decision of the year in late January.

Governor Tiff Macklem said at the time that the central bank’s governing council remains satisfied with where the policy rate stands as trade uncertainty continues to roil the economy.

Even if the headline inflation rate ticks higher as Desjardins expects, Bartlett said it likely wouldn’t be cause for concern from the Bank of Canada. Recent shorter-term measures of the central bank’s preferred core inflation metrics have shown signs of easing, he said, and he expects little change in those underlying price pressures in January.

“I think that’s something that could be persistent going forward. So hopefully we’ll see some continued good news on that front when we see the January numbers,” Bartlett said.

Craig Lord, The Canadian Press