Inflation and the Consumer Price Index in Canada

Canadian CPI: December update

Canada’s Consumer Price Index (CPI) rose 2.4% year over year in December, accelerating slightly from 2.2% in November. The increase was largely driven by the removal of last year’s temporary GST/HST tax relief from the year-over-year comparison, which pushed prices for previously exempt items higher on an annual basis, even without new price increases. This acceleration was partially offset by a larger decline in gasoline prices, which fell 13.8% year over year in December, compared with a 7.8% decline in November. Excluding gasoline, inflation rose 3.0%, up from 2.6% the month prior.

Core inflation measures showed some slight improvement in December, with both CPI Median and CPI Trim dropping to 2.5% and 2.7%, respectively. Mortgage interest costs rose 1.7% year-over-year, marking over two years of straight deceleration, as a series of Bank of Canada rate cuts and holds have brought relief to borrowers. Overall shelter inflation rose by 0.1% on a monthly basis.

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.

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 indicate that December 2025 saw a 5.2% increase in passenger vehicle premiums from December 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 cost of auto theft, 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 decreased 13.8% in December 2025 from the previous year, a larger decline than last month (-7.8% in November 2025). 

The U.S. auto tariffs have been at the top of many Canadians ' minds over the past 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.

How does inflation impact shelter costs and mortgage interest rates? 

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 December, Canadians were paying 1.7% more on their mortgage interest compared to the previous year. However, this has been steadily decreasing due to lower rates; as a result of Bank of Canada rate cuts, the MIC measure was 2.3% from November, 2.9% in October, and 3.6% in September. 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 1.6% decrease year-over-year in December, indicating a drop 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 November, Canadians paid 4.7% 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 5.3% increase in December 2025 compared to December 2024. The CPI basket also reveals that inflation has hit other home expenses, such as home maintenance and repairs. In December 2025, repairs saw a 1.1% 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.

Inflation increased to 2.4% in December, moving slightly above the Bank of Canada’s 2% target. However, core inflation showed modest improvement, with CPI Median and CPI Trim easing to 2.5% and 2.7%, respectively. This suggests underlying price pressures continue to cool, even as headline inflation was temporarily lifted by the removal of last year’s GST/HST tax relief. Taken together, the data support the view that inflation remains broadly under control, pointing to an increased likelihood that the BoC will hold its benchmark borrowing rate for the foreseeable future in 2026.

December 10, 2025: Bank of Canada announcement highlights

On December 10, 2025, the Bank of Canada held its overnight rate at 2.25%, maintaining its position after two reductions in September and October. This marks the lowest policy rate since early 2022 and reflects the Bank’s move away from rapid easing toward a more measured approach as the economy shows signs of stabilization.

• The decision was supported by stronger economic momentum. Canada recorded 54,000 new jobs in November, bringing unemployment down to 6.5%, while third-quarter GDP grew 2.6%, sharply outperforming earlier projections. Inflation has also cooled, with October CPI at 2.2% and core measures pointing to broad, sustained price moderation.
• Looking ahead, the Bank emphasized that uncertainty persists. Tariff pressures, trade disruptions, and the upcoming USMCA renegotiations all pose risks to the outlook. While markets broadly expect rate stability into 2026, policymakers warned they may need to adjust rates if inflation trends upward or if economic conditions deteriorate.

Read more: Bank of Canada holds target interest rate at 2.25% in December 2025 announcement

How inflation impacts 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.

How inflation impacts grocery prices

Food inflation is one of the most closely watched components of the Consumer Price Index, as Canadians feel changes in grocery prices more immediately than most other costs. While overall inflation has cooled, the cost of food in Canada has continued to rise, keeping grocery affordability under pressure.

In December 2025, prices for food purchased from stores rose 5.0% year over year, unchanged month over month. This continued the upward trend in Canada grocery prices, with increases driven largely by higher prices for key staples. Coffee prices rose 30.8% year over year in December, making it one of the largest contributors to grocery inflation, while prices for fresh or frozen beef increased 16.8%.

Looking at the broader picture, food costs in Canada increased 3.5% on an annual average basis in 2025, accelerating from a 2.2% increase in 2024. Over the year, Canadians paid 20.3% more for coffee on average, highlighting sustained price pressure in that category.

Meat prices also continued to push grocery prices in Canada higher. On an annual average basis, meat prices rose 5.8% in 2025, following a 3.0% increase in 2024. The largest upward pressure came from fresh or frozen beef, which rose 13.5% over the year.

Fresh fruit prices increased 2.5% on an annual average basis in 2025, reversing a decline in 2024. Together, these trends help explain why groceries are still getting more expensive in Canada, even as headline inflation shows signs of easing.

As food prices continue to rise faster than household incomes and overall inflation, many Canadians may need to adjust their shopping habits and grocery lists to fit their budget. Fortunately, there are several ways to help manage costs and make your grocery budget go further:

• Compare unit prices to get the best value
• Make a habit of using money-saving apps like Flipp, Checkout51, or Drop for coupons and cash-back offers
• Take advantage of price matching at participating grocery stores
• Pair coupons, promotions, and discounts with a rewards credit card to maximize your grocery savings

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

• Loblaws banner stores (No Frills, Real Canadian Superstore, Fortinos, Independent, and more): CIBC Dividend Visa Infinite Card
• Sobeys banner stores (Sobeys, Safeway, Foodland, FreshCo, Thrifty Foods, and more): Scotiabank Gold American Express Card and American Express Cobalt
• Metro banner stores (Metro, Food Basics, Super C, and more): BMO Eclipse Visa Infinite Card and Moi RBC Visa
• Costco: CIBC Costco Mastercard and Rogers Red World Elite Mastercard
• Walmart Supercentres: Tangerine Money-Back Credit 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.  Looking at Canada’s inflation history helps put today’s numbers into context. Since the COVID-19 pandemic, inflation has swung sharply in response to economic shutdowns, reopening pressures, and interest rate changes. Tracking these month-to-month movements shows how inflation has evolved and why short-term changes don’t always reflect longer-term trends.

Inflation growth since the pandemic

Canada CPI release dates

Statistics Canada publishes CPI data monthly, reflecting price changes from the previous reference period. These releases are closely watched by policymakers, lenders, and consumers.

Source: Statistics Canada

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