Canada’s annual inflation rate climbed to 1.9% in January, driven by a sharp increase in gas prices that offset the impact of the federal government’s tax relief measures, according to Statistics Canada’s latest report.
The agency noted that gasoline prices surged by 8.6% year-over-year, largely due to a 25.9% spike in Manitoba, where the provincial gas tax was reinstated after a temporary suspension in 2024. Natural gas prices also rose by 4.8%, reflecting increased demand in Ontario and Quebec following last year’s oversupply.
The federal GST holiday, which provided temporary relief on certain goods and services, helped keep inflation below the Bank of Canada’s 2% target. However, analysts warn that underlying inflationary pressures are building. Stephen Brown, deputy chief North America economist at Capital Economics, suggested that the central bank may be nearing the end of its rate-cutting cycle. Future monetary policy decisions, he noted, could depend on potential U.S. tariffs imposed by President Donald Trump.
Meanwhile, restaurant food prices fell by a record 5.1% year-over-year, and alcohol prices declined by 3.6%, both benefiting from the government’s temporary tax relief. However, these measures expired over the weekend. Without the tax break, Statistics Canada estimates the annual inflation rate would have been 2.7%, up from 2.3% in December.
Mortgage interest costs remain a key driver of inflation, rising 10.2% annually. While this marks the 17th consecutive month of deceleration since the 30.9% peak in August 2023, housing-related costs continue to put pressure on inflation.
With a growing number of inflation components exceeding 3% growth in January, Desjardins managing director Royce Mendes expects the Bank of Canada to keep interest rates steady in March, though he emphasized that upcoming economic data and any tariff developments will be critical factors in the decision.