Canada’s inflation picture is showing signs of relief. For many households, however, that relief still isn’t reaching the grocery aisle.
New data from Statistics Canada shows the country’s headline inflation rate eased to 2.3 per cent in January. That figure came in slightly below economists’ expectations and down from 2.4 per cent in December. Lower gasoline prices and a cooling housing market helped pull overall inflation down, offering some breathing room for consumers.
Gas prices fell 16.7 per cent compared with a year earlier, largely due to the end of the consumer carbon price last spring. At the same time, shelter inflation, a long a source of strain for Canadian households, dropped to its lowest level in nearly five years as rent growth continued to slow.
Those improvements were offset by a renewed acceleration in food inflation. Food prices rose 7.3 per cent year-over-year in January, up from 6.2 per cent in December. As a result, grocery bills remain a major pressure point even as other household costs begin to ease.
Reading between the lines
According to TD senior economist Leslie Preston, part of the increase reflects statistical distortions rather than a sudden surge in food costs. She said some inflationary pressures from previous years are still moving through supply chains, meaning consumers are feeling their effects with a delay.
One of the biggest contributors to January’s food inflation was a sharp jump in restaurant prices, which rose 12.3 per cent compared with a year earlier.
That increase was largely tied to the federal government’s temporary sales tax break, often referred to as a “tax holiday”, which was fully in place in January 2025. Because the tax break has since expired, annual comparisons now make prices appear higher as the tax is added back into inflation calculations.
The same effect pushed up prices for alcohol, children’s clothing, toys, and games. With February marking the final partial month of the tax reprieve in 2025, Preston said those distortions should gradually fade from the data in the months ahead.
A point of political contention & global factors
Food prices have also become a flashpoint in federal politics. Conservative Leader Pierre Poilievre blamed rising grocery costs on regulatory fees and supply-chain burdens. In a letter to Prime Minister Mark Carney, he called for reversals of Liberal policies he argues are driving prices higher.
At the grocery store level, food prices rose 4.8 per cent year-over-year in January, slightly slower than December’s five per cent increase. Some categories showed relief. Fresh fruit prices fell 3.1 per cent over the month as stable growing conditions eased costs for berries, oranges, and melons.
That relief has not been universal. Staples such as coffee and beef continue to post double-digit price increases. Preston emphasized that those increases have little to do with tax changes.
Instead, she pointed to the weaker Canadian dollar earlier in 2025 and Canada’s retaliatory tariffs on the United States. Those measures targeted imported grocery products, including Florida orange juice, raising costs for importers. Over time, those higher costs have been passed on to consumers.
Although the Canadian dollar has recovered somewhat and Ottawa rolled back most U.S. counter-tariffs in September, supply-chain effects tend to show up with a delay. Research by Bank of Canada senior economist Olga Bilyk found a close link between food inflation and supply-chain costs, typically with a six-month lag.
That lag works both ways. As those pressures ease, grocery inflation should cool. However, the relief is unlikely to appear immediately.
Some of the forces affecting food prices are global. Droughts in recent years have reduced cattle herds and disrupted coffee production, pushing prices higher worldwide.
Even so, food prices in the United States rose just 2.9 per cent in January. That gap highlights Canada’s greater vulnerability to currency fluctuations and import costs, particularly in winter months when less fresh food is grown domestically.
To cut or not to cut?
January’s inflation report marked the first major data release since the Bank of Canada held its benchmark interest rate steady at 2.25 per cent. Preston said inflation across the broader household basket is cooling slightly faster than TD had expected, though that alone is unlikely to prompt immediate rate cuts.
The central bank would likely need to see several consecutive months of similar progress before shifting toward an easing stance. Financial markets currently see little chance of a rate cut at the Bank of Canada’s March 18 decision, with odds sitting just above 10 per cent, according to LSEG Data & Analytics.
BMO chief economist Doug Porter said recent improvements in core inflation measures are encouraging. Still, he cautioned that monetary policy has limited ability to offset deeper structural and trade-related challenges facing the economy.
He added that if inflation continues to slow, the door remains open for future rate relief should economic growth weaken further.
Before making that call, the Bank of Canada will get another key data point with February’s inflation report, due ahead of its next policy decision in March.
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