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Canada's inflation rate edged down to 1.8% in December as GST break kicked inン

Canada's inflation rate edged down to 1.8% in December as GST break kicked in

Economists polled by Reuters had expected inflation to come in at 1.9 per cent in December. (Photo by Liang Sen/Xinhua via Getty Images) · Xinhua News Agency via Getty Images

Canada's annual inflation rate slowed to 1.8 per cent in December after rising 1.9 per cent in Novem ber, as the temporary GST tax break brought down the price of restaurant meals, alcohol and toys. Economists polled by Reuters had expected inflation to remain unchanged at 1.9 per cent last month.

The December slowdown was driven in part by the GST tax break on a range of items that went into effect in mid-December. Statistics Canada noted that 10 per cent of all items in the CPI basket are affected by the tax break, with the major components impacted including food; alcoholic beverages, tobacco products and recreational cannabis; recreation, education and reading; and clothing and footwear.

"As the tax break came into affect mid-month, a further impact is expected to be seen in January when prices during the full month were subject to the lower rate," CIBC economist Andrew Grantham wrote in a research note.

"Overall, there are a lot of moving pieces and temporary factors playing out in the inflation data at the moment. But through the volatility underlying price pressures appear to be close to two per cent and we continue to expect a 25 basis point reduction in interest rates from the Bank of Canada next week."

Economists expect the Bank of Canada will look through the temporary price impact and markets are betting that the central bank will cut its benchmark interest rate at its next decision on Jan. 29. According to Reuters, markets are betting there's an 81 per cent chance of a 25 basis point cut next week.

"The headline dip in inflation was clearly flattered by the GST holiday, which will help again in next month's reading for January," BMO Capital Markets chief economist Douglas Porter wrote in a research note. While he noted that two measures of core inflation have increased on a three-month basis, he said that "we believe that the heavy overhang of trade uncertainty – possible U.S. tariffs – overrides almost all else."

"As a result, we suspect that today's reading is just good enough to allow the Bank of Canada to trim next week, for risk management purposes," Porter wrote.

Statistics Canada said that food purchased from restaurants and alcoholic beverage purchased from stores contributed the most to the deceleration. Restaurant food prices were down 1.6 per cent year-over-year, and declined 4.5 per cent on a monthly basis thanks to the GST break. Alcoholic beverage prices fell 1.3 per in December, dropping 4.1 per cent on a monthly basis. The price of toys and games also decreased 7.2 per cent in December, compared to a 0.6 per cent decline in November.