Craig Lord
Many consumers are still withdrawing from decades of high inflation levels during the pandemic recovery, when prices for housing, fuel and groceries are soaring.
But the factors that shape inflation today are different from those that play out at the end of the lockdown, and MPs and Canadian banks are now struggling to deal with the impact of tariffs, taxes and government spending on the cost of living.
Here’s what you need to know about the state of inflation in Canada.
Where is inflation today?
Statistics Canada said the annual inflation rate in August was 1.9%, up from 1.7% in July.
Bank of Canada is responsible for maintaining Canadian price stability and set annual inflation at 2%.
“I mean, 1.9% are actually pretty good,” said Mostafa Askari, chief economist at the Institute for Fiscal Research and Democracy and the University of Ottawa.
Askari said the brief monthly increase in inflation is not much more than worrying.
He said policy makers should focus on trends for six months or more before responding to actions on price numbers.
What is driving inflation?
Randall Bartlett, deputy chief economist at Desjardins, said the biggest factor in reducing inflation now is the end of consumer carbon prices.
Since the carbon tax has been levied for consumers in 2024, the Liberal move to end the policy in April means that air pumps have been lower in recent months, biasing data in annual comparisons.
As population growth slows down, housing inflation is also declining as competition for apartments is relaxing and renting prices in many cities.
Canadians who buy new mortgages today also see the price of a five-year fixed loan approaching 4%. The interest rate was far exceeded 5% during this period last year.
One area that consumers still feel pinched is food inflation, with Statcan fixed at 3.4% in August. That rate is still lower than the annual double-digit gains at the peak of inflation-era few years ago.
Askari said consumers feel the cumulative impact of years of inflation rising prices, especially at grocery stores.
He said prices tend to rise rapidly, but in the process of falling, prices will “stick” if they relax a little.
Do counting tariffs drive prices higher?
Another force that affects grocery inflation is Canada’s retaliatory tariffs on the United States.
Certain counter tariffs are paid by Canadian companies to import U.S. goods – an input to manufacture products is imposed and included in the final cost of the goods or absorbed into the company’s profit margin.
These fees are more likely to occur in rotible items purchased by grocery stores such as Florida orange juice. However, fresh food prices are also susceptible to changes in weather and growth around the world.
Askari said this makes it difficult to absolutely determine the price related to the impact of the tariff.
Canada gave up most of its retaliatory tariffs on the United States earlier this month.
Coupled with the elimination of consumer carbon prices, Bartlett expects the end of over-the-counter tariffs to keep Toutiao inflation below the full percentage in 2026.
But he also hopes that the inflationary reading volume of previous billing to September will continue to exist and gradually disappear for the rest of the year.
What about government spending?
Conservative leader Pierre Poilievre accused the federal government of refueling inflation deficits.
“The deficit drives inflation, grocery prices, housing costs and interest rates,” he said on September 17 during the issue.
Experts say federal spending has less impact on inflation than that.
Askari said that when governments spend more money in the pockets of Canadians or businesses, it drives spending demand in the economy. More demand, no related supply, can drive inflation to rise.
Askari said when government spending aims to increase supply, for example, by expanding housing stocks, the pressure on inflation could be alleviated.
“In principle, deficit spending may put pressure on prices. It is incorrect to call every government expenditure to inflation,” he said.
Canada’s economy was signed in the second quarter, and most economists expect a modest recovery in the third quarter.
Bartlett said this reflects an economy where the economy is below its potential – in other words, economic sparseness in the economy – so some fiscal stimulus can “mask” the economy without triggering a sharp peak in inflation.
However, there are restrictions. Bartlett said that given the economic situation, federal liberals have telegraphed the scale of the deficit will be in the upcoming fall budget.
Bartlett said Ottawa’s planned capital investments could inflation in the near term if they cause a surge in demand for construction labor and materials.
However, the same spending plan may lift them out of inflation if it helps to increase economic productivity in the medium or long term in the future.
“In terms of the efficiency of this infrastructure investment, the evidence for pudding will be tasting,” Bartlett said.
At the same time, if they pass, the plan to reduce federal operating expenses by up to 15% will be disinfection.
What happened to the interest rate?
Banks in Canada have been watching inflation carefully this year, waiting to see how the U.S. tariff dispute will affect prices and the economy.
While central banks say there is still a lot of uncertainty on trade, monetary policy makers lowered the benchmark interest rate by a quarter last week to 2.5%.
Bank of Canada Governor Tiff Macklem said the balance of risks has turned to a recession and has moved away from price increases.
“If they think (inflation) is risky, they won’t do that,” Ascari said of the lowered tax rates.
Bank of Canada has not yet introduced the federal government’s recent spending announcement to its forecast.
McClem said the central bank will do so once those spending plans are released in the federal budget, which is scheduled for November 4, about a week after the next announcement by the Bank of Canada.
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Last modified: September 26, 2025
