The rate of inflation in Canada dropped to just 1.8%, which is a shocking drop.
The decrease in prices is due primarily to the sales tax exemption that was introduced at mid-month. This reduced the price of items like children’s clothes, alcohol and restaurant meals.
This drop confirms that the economic trend is positive.
The monthly consumer price index (CPI), which reflects the effect of sales tax reduction, fell by 0.4%.
It’s the first month in a long time that consumer spending has not been correlated with inflation.
In December the cost of alcohol dropped by 1.3% after increasing 1.9% in November.
Prices for restaurant food also dropped by 1,6% after a rise of 3.4% the previous month.
The Government plans to extend sales tax exemption, originally scheduled to expire in mid-February.
The consumer will get an additional month’s relief in January from the high cost of living, instead of just 18 days.
Tax relief reduced about 10% of items included in the CPI basket. This has helped to ease financial pressure on families.
Since August, the Bank of Canada has been able to reduce its main policy rate to 3.25 percent by a total of 175 basis point.
The central bank could cut rates next week if inflation drops further in December. Tiff Macklem, Governor of the Bank of Canada, stated last month that rate reductions would continue to be gradual.
CPI median and CPI trim, the preferred measures of core inflation by the central bank, saw a small decrease as well.
Analysts expect the bank to reduce its interest rate at their next meeting, which will be held on Monday 29th January by 25 basis points.
Experts remain wary due to the mixed signals on the financial market.
Andrew Grantham, an economist from CIBC Capital Markets, suggests that both temporary and long-term factors influence inflation.
Canada is facing a number of economic challenges. The key to its growth will be to balance fiscal policy with inflation and consumer sentiment.
While the government’s reduction in sales taxes will benefit consumers, maintaining an economy that is stable will require a solid strategy and good management amid global uncertainty.
The ICD published the following article: Canada’s Inflation Rate Drops to 1.8% as Sales Tax Break Eases Consumer Prices.
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