How Will GST Cut Effect Inflation?

A partial answer to the question I raised in my last post.

According to Stats-Canada's Consumer Price Index:

Since the price changes measured by the CPI take into account the value of the consumption taxes paid by Canadians, this 1% decrease will have an impact on the CPI.

A rough estimation of the impact of this reduction on the level of the CPI suggests a decrease in the order of 0.6%. This estimation is based on the assumption that the entire amount of the decrease will be transferred to consumers and that the industrial structure that underlies the way that prices are determined will remain the same.

Since some products, such as many foods sold in supermarkets, are exempt from GST, the resulting decrease will necessarily be less than 1%.

Note that the 0.6% decrease assumes that the entire amount of the cut will be passed on to consumers. Therefore, a divergence from this number in the actual figures for July and August will be a good indicator of how much got intercepted by middle men (who, IMHO, are its real intended target).

Note also that the May figures were released on June 20th, so by the end of August the verdict should be in.