This morning, Statistics Canada reported that the implementation of Harmonized Sales Tax in Ontario and British Columbia helped drive the national inflation rate from 1.0% in June to 1.8% in July. By comparison, the Bank of Canada’s core inflation rate (which excludes tax changes and volatile items) edged down from 1.7% to 1.6%.
However, annual inflation rates are not the best measure of the HST’s impact on consumers. Statistics Canada also released data on monthly price changes, allowing us to compare June (just before the HST) to July (with the HST).
Nova Scotia increased its sales tax in July, but the remaining seven provinces comprise a control group. Consumer prices ranged from a decrease of 0.3% in Quebec to an increase of 0.5% in Alberta.
Adding up the seven provinces according to their Consumer Price Index weighting indicates an average price change of 0.0% between June and July. Since average consumer prices were flat in the rest of Canada, the HST appears to be wholly responsible for the 0.9% increase in Ontario and the 1.1% increase in British Columbia.
HST advocates argued that the consumer impact would be mitigated by businesses passing through input tax credits as lower pre-tax prices. For example, TD Economics predicted that the HST would increase consumer prices by only 0.7% in Ontario and British Columbia. But today’s numbers showing larger increases indicate that businesses have not (yet) passed their input tax credits along to consumers.
Implications for Monetary Policy
The Bank of Canada has appropriately promised to ignore one-time tax changes in formulating monetary policy. For the next eleven months, annual inflation rates will be comparing post-HST prices with pre-HST prices.
Therefore, headline inflation rates will be significantly above any underlying trend. These misleadingly high inflation rates should not be used to justify higher interest rates.
UPDATE (August 22): On Friday, I appeared on CBC News Network to discuss this topic. My panel starts 14 minutes into this video. (At 16:40, I felt like something was caught in my throat. Fortunately, I had a glass of water that allowed me to recover.)
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- The Loonie’s Stagnant Purchasing Power (March 7th, 2012)
- Luxury carbon (November 24th, 2010)
- We told you so: HST introduction a factor behind GDP drop in July (October 1st, 2010)
- Marc’s Summer Reading (July 22nd, 2010)