Inflation in Canada

Inflation is a decline in the value of money – hence why $10 doesn’t go as far today as it once did. We typically measure inflation through the consumer price index, which is comprised of hundreds of goods and services, weighted by how Canadians spend their money. (As a result, more of CPI is weighted toward housing costs than clothing or gasoline purchases.)

Every month, Statistics Canada publishes new inflation figures. Generally speaking, when people refer to the inflation rate, they’re speaking about the annual percentage change in CPI for all items. However, there are many ways of parsing the data. One can look at changes over different timelines (for example, monthly) or for particular products (for example, airfares).

Policy makers often look at core measures of inflation, of which there are several. One is CPI, minus energy and food. Why are those items excluded? Prices for those products can be volatile and greatly influenced by international events. For example, bad weather in Mexico can lead to a shortage of various fruits and vegetables, driving up their prices. But those shortages – and price surges – aren’t expected to last. Thus, economists will look to core measures of inflation to get a better sense of underlying price pressures.

Canada’s annual inflation rate edged down to 2.3 per cent in January, from 2.4 the previous month.

Shelter inflation – long a pain for households in Canada – also fell to its lowest level in nearly five years as rent pressures abate. Those declines helped offset food inflation, which accelerated to 7.3 per cent annually in January from 6.2 per cent a month earlier.

Canada’s inflation edged down to 2.3 per cent in January, Statistics Canada says. Here’s how the provinces compared to the national rate.

In theoretical terms, there are a couple inflation drivers worth noting. Often, demand outpaces the economy’s capacity to produce those goods and services, known as demand-pull inflation. This can be summed up as “too many dollars chasing too few goods.”

During the pandemic-era inflation crisis, the Bank of Canada repeatedly said that demand was too strong. Subsequently, it raised interest rates to temper that demand, aimed at slowing price growth.

Conversely, there is cost-push inflation. This occurs when there are rising costs of production – such as wages and materials – that prompt companies to raise prices or curtail production.

In the recent spell of inflation, there were numerous explanations. A key contributor higher inflation was gasoline. (Those prices shot up after Russia’s invasion of Ukraine, though they had been increasing before then.) Another big contributor was new and used cars. (A computer-chip shortage affected auto production, leading to barren lots and scant options for consumers.) Then there’s housing. Various aspects of shelter CPI – such as mortgage interest and rents – contributed to steep inflation.

There are further explanations. For one, Canadians saved a lot of money during the acute phases of the pandemic, leading to a reopening boom of spending on certain services, such as travel. Household disposable income also rose substantially, raising questions about overspending in the federal government’s COVID-19 income supports. The U.S. fiscal response to the pandemic was especially large, such that American consumers were creating plenty of demand in overseas markets. There’s also imported inflation. The Canadian dollar has tumbled since 2021, making it more expensive to buy goods in U.S. dollars.

To tamp down inflation, the Bank of Canada raised interest rates at the most aggressive pace in several decades. Over a series of decisions, the bank raised its benchmark interest rate from 0.25 per cent in 2022 to 5 per cent on July 12, 2023.

The central bank lowered interest rates four times in 2025 – and nine times since the summer of 2024 – the bank is now expected to remain on hold through the first half of 2026. The current benchmark interest rate is at 2.25 per cent. The central has held rates steady for the past two decisions.

The bank has indicated that it expects to remain on hold for some time, but isn’t ruling out the possibility of future rate moves if warranted. Bay Street analysts and financial markets expect the bank to remain on hold through 2026.

The next interest rate announcement is March 18, 2026.

Inflation has largely normalized over the past few years. After hitting a 40-year high of 8.1 per cent in the summer of 2022, the pace of inflation declined quickly, and has been within the bank’s 1-per-cent to 3-per-cent control range over the past year.

Some concerns remain. Core inflation measures, which capture underlying price pressures, have been stuck close to 3 per cent for months – although they did trend lower in December. And there are pockets of higher inflation, including in categories that are important for cost-of-living concerns, such as food and rent.

Looking forward, however, the Bank of Canada expects inflation to moderate in the coming months and settle close to 2 per cent through 2026. This assumes cost pressures owing to the trade war with the United States are offset by weak demand in the Canadian economy, which make it difficult for companies to pass along price increases.