Canada’s inflation rate eased slightly in January, falling to 2.3 per cent, but the cost of groceries continues to climb at a significantly faster pace, with food prices rising 7.3 per cent year-over-year, according to Statistics Canada data released Tuesday.
The deceleration in the overall inflation rate was largely driven by a substantial drop in gasoline prices – down 16.7 per cent compared to January 2025 – and easing shelter costs, which saw their lowest increase in nearly five years. Still, these declines were offset by the accelerating cost of food, putting renewed pressure on household budgets.
The surge in food inflation is partially attributed to the full-year effect of the end of the federal government’s temporary tax holiday on qualifying goods and services, which concluded in early 2025. The two-month break on the federal portion of the Goods and Services Tax (GST) is now fully reflected in year-over-year comparisons, artificially inflating prices for categories like restaurant meals, toys and games.
Restaurant meal costs jumped 12.3 per cent annually in January, a significant contributor to the overall food inflation figure. Prices for alcohol, children’s clothing, and toys similarly saw notable increases due to the end of the tax relief measure. TD senior economist Leslie Preston noted that these effects are expected to commence unwinding in the coming months.
While the “tax holiday” effect explains some of the increase, other factors are at play. Grocery store prices rose 4.8 per cent annually, a slight deceleration from the 5 per cent increase recorded in December. However, staples like coffee and beef continue to experience double-digit price hikes, which Preston attributes to the weaker Canadian dollar in early 2025 and retaliatory tariffs imposed on the United States.
Canada’s retaliatory tariffs, targeting U.S. Grocery products like Florida orange juice, increased import costs for Canadian consumers. Although the Canadian dollar has partially recovered and many of the U.S. Counter-tariffs were lifted in September, the impact on the grocery supply chain is being felt with a delay, according to Bank of Canada analysis.
A recent analysis by Bank of Canada senior economist Olga Bilyk demonstrated a strong correlation between food inflation and increased supply chain costs, with a six-month lag. This suggests that relief from these cost pressures will not be immediate.
Global factors are also contributing to the problem. Droughts in previous years have reduced cattle herds, driving up beef prices, while challenging growing conditions for coffee beans have pushed up the cost of coffee. Despite these global pressures, food prices in the United States rose by only 2.9 per cent in January, suggesting Canada is being disproportionately affected.
Preston explained that Canada’s reliance on imports, particularly during the winter months when less food is grown domestically, makes it more vulnerable to currency fluctuations and import price increases. Bilyk’s analysis further supports this, highlighting the impact of rising import costs for goods like coffee and chocolate due to extreme weather and trade tariffs.
The January inflation report is the first data point considered by the Bank of Canada since it held its benchmark interest rate steady at 2.25 per cent last month. While the overall easing of inflation is encouraging, the persistent rise in food prices complicates the picture.
Preston indicated that the Bank of Canada will require to see several consecutive months of slowing inflation before considering further interest rate cuts. Financial market odds of a rate cut at the Bank of Canada’s next decision on March 18 stood at just over 10 per cent as of Tuesday afternoon, according to LSEG Data & Analytics.
BMO chief economist Doug Porter noted that progress on the central bank’s preferred core inflation metrics is positive, but cautioned that the bar for another rate cut remains high, given the Bank of Canada’s concerns about the limitations of monetary policy in addressing Canada’s structural economic transition.
Conservative Leader Pierre Poilievre responded to the report by blaming regulatory fees for driving up food prices and calling on Prime Minister Mark Carney to reverse what he termed “Liberal policies” to prevent Canadians from going hungry.
The Bank of Canada will release its next inflation report for February before its March policy decision.
