Bank of Canada Governor Sees Potential Inflation Dip with Carbon Tax Removal

Bank of Canada’s Governor, Tiff Macklem, recently informed the House of Commons finance committee that eliminating the federal carbon tax could result in a notable, albeit temporary, decline in inflation across Canada. Currently, inflation stands at 3.8%. Macklem indicated that withdrawing the carbon tax might produce a one-time reduction of 0.6 percentage points, lowering the rate to 3.2%. However, he noted that this effect would be short-lived, lasting only for a year.

The carbon tax is estimated to add roughly 0.15 percentage points to annual inflation. It increases the cost of light fuel oil by over 17 cents per litre and gasoline by more than 14 cents, contributing to elevated grocery prices and overall living costs. In light of these economic pressures, Statistics Canada reported that 15% of households are cutting back on food spending to manage their energy bills.

Conservative MP Philip Lawrence asked if lifting the carbon tax would ease Macklem’s responsibilities given the potential for a significant inflation decline. The Conservatives, led by Pierre Poilievre, have accused the government of fueling inflation through deficit spending and fuel surcharges, which they claim are worsening the cost-of-living crisis.

Responding to these issues, the Liberal government announced a three-year pause on the carbon tax, primarily affecting the Atlantic provinces where heating needs are lower. Despite this initiative, the Parliamentary Budget Officer has challenged the government’s assertions that climate incentive payments offset the costs associated with the carbon tax.

Saskatchewan Premier Scott Moe has also expressed concerns about the affordability of Trudeau’s carbon tax, threatening to halt its implementation unless the federal government extends the pollution price exemption to Saskatchewan.

Despite fluctuating inflation rates, the Bank of Canada has kept interest rates steady at five percent, with hopes of achieving a target inflation rate of two percent by 2025, and forecasting a 3.5% average consumer price index until mid-2024.