Canada’s inflation rate edged down to 2.3% in January, a slight decrease from 2.4% in December, according to Statistics Canada data released Tuesday. While the overall rate cooled, the cost of groceries continued to rise at an accelerating pace, adding to financial pressures on Canadian households.
The decline in the headline inflation figure was largely driven by a 16.7% drop in gasoline prices compared to the same period last year, a decrease attributed to the removal of the federal carbon tax on fuel in April 2025. Housing costs also contributed to the slowdown, reaching their lowest level in nearly five years as pressures on rental rates eased.
However, these decreases were offset by a significant jump in food inflation, which climbed to 7.3% in January, up from 6.2% the previous month. Prices for food purchased at restaurants saw a particularly sharp increase, surging 12.3% year-over-year. This increase is linked to the end of a temporary federal Goods and Services Tax (GST) exemption on restaurant meals and other goods and services that fully took effect a year ago.
TD economist Leslie Preston noted that a portion of the increase in food inflation is a statistical effect, while ongoing pressures within the supply chain continue to impact prices. The prices of alcohol, children’s clothing, toys, and games also rose sharply last month, after having decreased in January 2025 due to the GST exemption.
The rising cost of imported food is also a factor. According to Preston, the Canadian dollar’s weakness earlier in 2025, coupled with retaliatory tariffs imposed by Canada on the United States – targeting products like Florida orange juice – have made importing food and ingredients more expensive. While the Canadian dollar has partially recovered and Ottawa lifted most of its retaliatory tariffs in September, the effects on the food supply chain are lagging.
A recent analysis by Bank of Canada economist Olga Bilyk found a strong correlation between food inflation and rising supply chain costs, with a six-month delay. This suggests that relief from these cost pressures will take time to translate into lower grocery bills for Canadians.
The January inflation report is the first economic data release since the Bank of Canada held its key interest rate at 2.25% last month. Preston indicated that the data suggests consumer price declines are occurring at a slightly faster pace than previously anticipated by TD. However, she cautioned that the Bank of Canada will likely need to see several consecutive months of similar declines before considering further interest rate cuts.
According to LSEG Data & Analytics, the probability of an interest rate cut at the Bank of Canada’s next decision on March 18th stood at just over 10% on Tuesday afternoon. BMO chief economist Doug Porter wrote in a note to clients that the progress made in January on core inflation – the central bank’s preferred measure – will be encouraging. He added that the bar for another rate cut remains high, with bank officials warning that monetary policy can do little more to support the economy’s structural transition.
The Bank of Canada will review February’s inflation data before making its next decision in March.
