Inflation and the Consumer Price Index in Canada

Canadian CPI: March update

The latest Consumer Price Index (CPI) reading for March 2025 revealed that inflation grew 2.3% year-over-year, down from 2.6% in February. This slowdown was largely driven by the lower prices for travel tours and gasoline in March. The end of the temporary GST/HST break on February 15 also contributed to higher prices in March, putting upward pressure on prices for eligible products.

Key measures of core inflation, CPI Trim decreased to 2.8% from February 2025 and CPI Median remained stable at 2.9%, signalling persistent underlying price pressures. Meanwhile, mortgage interest costs rose 7.9% year-over-year, down from 9% in February, marking the 19th consecutive month of deceleration. This slowdown reflects the continued impact of the Bank of Canada’s rate cuts since June 2024, which have gradually reduced borrowing costs and contributed to shelter inflation easing to 3.9%.

Read more: March CPI comes in surprisingly low at 2.3%

Canada CPI release dates

Source: Statistics Canada

What is inflation?

Inflation refers to how prices rise or fall for common goods and services over time, and how that affects consumers’ purchasing power. This is measured using a “basket of goods and services”, and tracking how their prices change over the course of the year. Statistics Canada updates this basket annually, tweaking the weights of various components to accurately reflect consumer behaviour. This basket of goods is then used to set the Consumer Price Index, which provides a measurement for how inflation is rising or falling. This is also referred to as the “headline” inflation rate. Meanwhile, the “core” measures of inflation provide more nuanced looks into how prices are evolving, with the extremes stripped out.

When the headline inflation rate rises, this means the prices of consumer goods and services are also increasing, while a dropping inflation rate indicates deflation is occurring, meaning prices are falling, and consumers are seeing greater purchasing power.

What is the Consumer Price Index?

• The Consumer Price Index (CPI) is an index that tracks how much the average Canadian household spends on a variety of goods and services, and how that changes over time, which is referred to as price inflation.
• The Consumer Price Index is based on a 700-item basket of goods and services, divided into eight components: Food; Shelter; Household operations, furnishings and equipment; Clothing and footwear; Transportation; Health and personal care; Recreation, education and reading, and Alcoholic beverages, tobacco products and recreational cannabis.

The impact of tariffs on inflation

The Canadian and global economies have been subjected to months of uncertainty due to ongoing tariff threats from United States President Donald Trump. While the form, and implementation, of these tariffs continues to evolve, they’ve already led to an overhaul of global trade policy – and that will have implications for consumer prices around the world, including Canada. 

While Mr. Trump’s most recent threat to impose a 50% reciprocal tariff on over 60 nations has been paused for 90 days, the global supply chain has started to shift, which will affect goods coming into Canada in a myriad of ways. Canada is also vulnerable to an economic downturn in the US, which is the recipient of 80% of our exports. Overall, price growth in Canada will depend on how the trade situation evolves globally, and whether other countries increase their prices in response to tariffs.

Tariffs already in force, such as a 25% levy on Canadian-made steel and aluminum, as well as cars and light trucks, will hammer our domestic auto and manufacturing industries which will drive prices – including the cost of vehicles – higher, and lead to labour hardship. Goods that aren’t currently compliant with CUSMA are also being tariffed at a rate of 25%, along with a 10% levy on non-compliant energy products and potash. 

However, there are some scenarios where tariffs could potentially lead to lower prices for Canadians. One is that a stronger Canadian dollar will help offset rising prices by improving Canadian purchasing power, in turn making imports cheaper. The Loonie has been appreciating against the U.S. dollar in recent weeks, as investors have lost some faith in the safety of U.S.-Dollar-based assets. 

The exclusion of China from tariff exemptions could also lead to lower prices for some products. In an interview with the Toronto Star, William Huggins, professor of finance and business economics at McMaster University, says product prices could drop in some categories – such as clothing, furniture, and electronics – due to the US continuing to place a 145% tariff on Chinese goods. As Toronto Star business reporter Ana Pereira writes, that essentially prevents China from participating in the American market, and will result in an oversupply of manufactured products globally. However, this benefit would be short-lived if China reduces its manufacturing presence due to lower demand, which would drive prices higher again.

Overall, Canadian business owners and consumers expect that inflation will rise in the near term due to tariffs. The second-quarter 2025 Business Outlook Survey released by the Bank of Canada reveals that inflation expectations have increased considerably from the previous quarter, writing “Concerns around the inflationary impacts from tariffs are outweighing reduced inflationary pressures from weak demand. Both businesses and consumers expect trade tensions to lead to higher prices.” 

However, the survey finds that longer-term expectations for inflation remain largely unchanged, indicating businesses expect the effects of higher tariff-induced inflation to be temporary.

In its most recent March report, Statistics Canada clarifies it does not make any special adjustments to the way it calculates the Consumer Price Index due to tariffs, as “their effect is embedded in the final prices collected.”

“Statistics Canada will continue to monitor developments on tariffs and the impact on consumer price inflation,” the agency states.

Transportation 

The transportation component of the CPI basket accounts for the price of vehicles, public transportation, parking fees, gas and auto insurance. Inflation on car insurance premiums has seen a steady price increase year-over-year, as shown in the chart below. The most recent data indicates that March 2025 saw a 7% increase in passenger vehicle premiums from March 2024.

As with all Canadian insurance products, insurers take into consideration market changes when calculating premiums. The CPI basket reveals that inflation hit the price of new and used cars, auto parts, and vehicle repair services, making claims more expensive for the auto insurance industry. Other market factors like the ongoing auto theft crisis also contribute to rising claim costs. All of these factors together lead to inflated claim prices, which drive up Canadian auto insurance rates, further increasing the cost of car ownership for drivers. 

Gas prices are also a major contributor to the CPI basket and one of the most volatile; energy prices can change rapidly based on external factors such as changes in the world’s crude prices, supply and demand imbalances, and the production capacity of refineries. Due to this, energy prices can spike or lower dramatically over the course of a month and can cause dramatic year-over-year base effects in the headline inflation number. This is why core inflation measures, such as the CPI Trim and CPI Median, are helpful, as they strip out some of these extreme price swings to reflect consumer spending trends better. The most recent data shows that gasoline prices increased 5.1% in February 2025 from the previous year. In comparison, prices decreased by 1.6% in March 2025 from the same period in 2024, highlighting how quickly energy prices can change.

The U.S. auto tariffs have been at the top of many Canadians ' minds this year. U.S. President Donald Trump officially imposed 25% tariffs on all vehicles and parts manufactured outside the United States on April 3, 2025. These taxes are expected to devastate the Canadian auto sector, which will trickle down to consumers through inflated prices to manufacture, purchase, repair and insure vehicles. Drivers are in for a costly future; however, auto insurance rates will not see an immediate spike, allowing Canadians to catch up on other rising costs before the tariffs hit their premiums.

Shelter inflation / mortgage interest costs

Shelter inflation is the largest contributor to the CPI basket. This reflects the high cost of housing in Canada, elevated mortgage rates, steep rent costs and home insurance rates. Shelter inflation in Canada is made up of:

• Mortgage interest costs (MIC): This reflects the price-induced changes in the amount of mortgage interest owed by homeowners. Both home price changes impact this and how they impact the homeowner’s mortgage balance, as well as the amount of outstanding principal borrowers carry on their mortgages, and the size of mortgage interest payments. In March, Canadians were paying 7.9% more on their mortgages compared to the previous year. However, this has been steadily decreasing due to lower rates, as a result of Bank of Canada rate cuts and lower bond yields; the MIC measure was 9% in February, and 10.2% in January. Overall, the measure has fallen from its peak of 30% in 2023.
• Home replacement costs: This refers to the amount of money it would take to rebuild or repair your home to its original condition at current market prices, not including the land it sits on. HRC saw a modest 0.1% increase year-over-year in March, indicating a slight rise in materials and labor costs.
  
• Rent costs: This index measures how the cost of rent is evolving at a national level. Statistics Canada also provides provincial breakdowns on rent inflation costs. In March, Canadians paid 5.1% more on rent than in the previous year.
• Homeowners home and mortgage insurance costs: This refers to the total insurance-related expenses homeowners pay, including the average premium for home insurance and mortgage insurance fees. Inflation in home insurance has caused average rates to increase year-over-year, with the most recent data showing a 4.3% increase in March 2025 compared to March 2024. The CPI basket also reveals that inflation has hit other home expenses, such as home maintenance and repairs. In March 2025, repairs saw a 0.7% increase year-over-year. These rising costs mean insurers will pay out more in claims and, as a result, will offset these incurred costs by raising the price homeowners pay for insurance. The same applies to the cost of home replacement; as inflation takes its toll, insurance providers will pass the added costs onto policyholders.

How inflation impacts the Bank of Canada

Inflation greatly impacts the cost of borrowing in Canada as it is a key measure considered by the Bank of Canada when it determines the level of its benchmark interest rate.

The Bank of Canada has a mandate to keep the pace of inflation at a 2% target – this is a range where price growth is stable and sustainable, without putting pressure on the economy and consumers. In order to maintain this 2% range, the Bank of Canada (BoC) will increase or decrease its benchmark Overnight Lending Rate (OLR), which Canadian lenders use to set their Prime rate and, by extension, their variable-rate borrowing products. When inflation is running too high, the central bank increases its OLR, to make it tougher to borrow and discourage spending. When the economy is at risk of being too soft, the BoC will cut its OLR to keep the flow of credit going, thereby stimulating the economy.

April 16, 2025: Bank of Canada announcement highlights

On April 16, 2025, the Bank of Canada decided to hold its benchmark interest rate at 2.75%, ending what would have been the eighth consecutive rate cut since June 2024. This decision marks a shift as the Bank navigates persistent global trade uncertainty, particularly surrounding U.S. tariffs.

• While March’s inflation reading dropped to 2.3%, it remains above the Bank’s 2% target. With these ongoing inflationary pressures, the BoC chose to hold rates steady, focusing on controlling inflation and supporting economic stability.
• For Canadian borrowers, the BoC’s rate hold means no immediate changes to variable-rate mortgages, as these are linked to the prime rate, which remains steady at 4.95%. 
• Fixed mortgage rates, influenced by bond yields, have seen fluctuations. After reaching a three-year low of 2.52% in early April, bond yields have since rebounded to around 2.7%, with the lowest available five-year fixed mortgage rate now at 3.79% (3.74% in Quebec).
• Savers with high-interest savings accounts (HISAs) and Guaranteed Investment Certificates (GICs), both tied to the prime rate, will see no changes in their returns.
• Looking ahead, the BoC has indicated that future rate changes will depend on how global trade conditions and inflation continue to evolve.

Inflation, interest rates and borrowing

The rate of inflation has a direct impact on the value of some investments, such as stocks; when inflation increases, it whittles the rate of return on those investments. This can have an impact on investor psychology – they are more likely to sell off their investments if they anticipate inflation will increase in the future. This also affects the bond market; investors sell off their bonds when they expect inflation will devalue them in the future, which in turn drives yields up, which also increases the overall cost of borrowing. This impacts products such as variable-rate mortgages, as well as personal loans and auto loans.

One type of investment that benefits from higher inflation are Guaranteed Income Certificates (GICs). These investments base their rate of return on the prime rate, which is set by the Bank of Canada’s trend-setting overnight lending rate. Rising inflation could prompt the Bank to delay further rate cuts, or increase its rate, which can lead to better GIC rates.

Check out the history of GIC rates to see how they react to interest rates and inflation over time.

Rising inflation and interest rates can have both negative and positive effects for savers. While rising inflation decreases the cash value of savings over time, a higher prime and Bank of Canada overnight lending rate can also prompt lenders to offer a higher interest rate on their savings products, such as high-interest savings accounts.

Groceries and food inflation

Food inflation is one of the most closely-watched components of the CPI basket of goods, as consumers acutely feel the impact of higher food prices. Over the past three years, food costs have steadily increased, creating long-term affordability challenges for many Canadians. 

Overall, food costs decreased in January and February, at 0.6% and 1.3%, respectively, due to the effects of the GST / HST holiday. However, they increased again in March as that tax break ended, with the overall food category increasing by 3.2% year over year, up from 1.3% in February. Food purchased in restaurants also rose by the same degree after three months of negative growth, and are nearly at par with where they were in November (3.4%) before the tax holiday was put in place. According to StatCan, stripping out the food category entirely would reduce the pace of CPI growth to 2.1% in March.

Food prices remain a top concern for many Canadians, as this price category continues to rise faster than that of household incomes and the overall headline inflation rate. The ongoing threat of tariffs, and efforts to “buy Canadian” may also drive up prices for certain goods. However, there are some ways to stretch your budget at the grocery store:

• Check unit prices to get the best value
• Use money-saving apps like Flipp, Checkout51, or Drop for coupons and cash-back offers
• Pair coupons and discounts with a rewards credit card to maximize your savings

Best credit cards for groceries in Canada – by grocery store:

• Food Basics, Longo’s, McEwan, Metro, Pusateri’s, Rabba, Safeway, Sobeys, Whole Foods: American Express Cobalt and Scotiabank Gold American Express
• Freshco, Loblaws, Superstore: CIBC Dividend Visa Infinite and Scotia Momentum Visa Infinite 
• Best Costco credit card: CIBC Costco Mastercard
• No Frills: Tangerine Money-Back Card
• Walmart Supercentres: Tangerine Money-Back Card and Walmart Rewards Mastercard

What is the Canada Core CPI?

In addition to the headline CPI numbers, there are also “core” measures of inflation, which strip out various items to provide a clearer picture of how price growth is evolving. These measures are closely monitored by the Bank of Canada when gauging inflation’s progress, and are key considerations in the central bank’s rate decision making. Core inflation measures are the following:

• CPI Trim: This excludes components of the CPI basket of goods which have price change rages within the tails of the distribution of price changes. More simply put, the CPI trim removes 20% of the weighted price variations at both the top and bottom ends of price changes over the course of the month. This removes volatility and extreme price movement from the basket, which can be based on outlier events; for example, severe weather impacting crop production, and by extension, the price of food.
• CPI Median: The CPI median tracks inflation growth that corresponds to the prices changes within the 50th percentile of the CPI basket within a given month. According to the Bank of Canada, “this measure helps filter out extreme price movements specific to certain components. This approach is similar to CPI-trim as it eliminates all the weighted monthly price variations at both the bottom and top of the distribution of price changes in any given month, except the price change for the component that is the midpoint of that distribution.”
• CPI Common: The CPI common tracks common price changes across the CPI basket’s categories. It uses a factor model (a type of statistical procedure) to determine what these common changes are, which helps remove price changes caused by factors specific to certain basket items.

Canada inflation rate history

Inflation is one of the single most important factors in any country’s economy, including Canada. Whether inflation rates are high or low influences everything from consumers’ purchasing power to Canadian mortgage rates and the overall strength of the Canadian economy. 

Seeing how inflation has fluctuated over the last few years, largely in response to the impact of the COVID-19 pandemic, provides Canadians with valuable insight and helps them better understand where rates may be headed in response.

Inflation growth since the pandemic

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