Inflation in Canada saw a slight increase at the start of the year, primarily driven by higher energy costs, though overall price growth remained below the Bank of Canada’s (BoC) target. The latest data from Statistics Canada showed that the Consumer Price Index (CPI) rose by 0.1% in January and 1.9% year-over-year, aligning with economists’ expectations.

One of the key factors affecting inflation was a temporary federal tax break, which resulted in a two-month suspension of the Goods and Services Tax (GST) on select purchases. This policy helped ease cost pressures on households, particularly in sectors like food and entertainment. As a result, headline inflation has remained at or below the BoC’s 2% target for six consecutive months. However, core inflation—which excludes food and energy—rose by 2.2% year-over-year, while the BoC’s preferred inflation measures (trimmed mean and weighted median) averaged 2.7%, up from 2.55% in December.

The rise in energy prices was a major contributor to the uptick in inflation. Gasoline prices surged 8.6% from a year earlier, especially in Manitoba, where the provincial gas tax was reinstated after being suspended in 2024. Natural gas prices also climbed 6% for the month and 4.8% annually, adding to household energy costs. Meanwhile, prices for new passenger vehicles increased by 2.3% year-over-year, although used vehicle prices declined by 3.4%.

The government’s temporary GST suspension provided some relief for Canadian consumers, particularly for food and beverage purchases. Food prices fell by 0.6%, marking the first annual decline since 2017, with restaurant meal prices experiencing a record 5.1% drop. Alcohol prices also saw a decline of 3.6% year-over-year, while the cost of toys and hobby supplies fell by 6.8%.

Looking ahead, Canada’s economic outlook remains uncertain as U.S. President Donald Trump has threatened to impose new tariffs on Canadian imports. Ottawa has promised retaliatory measures, while the BoC has warned that an extended trade dispute could lead to slower GDP growth and increased inflation. Although Trump initially planned to implement a 25% tariff on Canadian exports on February 4, he has delayed the decision to early March, citing ongoing negotiations on fentanyl trafficking prevention. However, recent remarks from Trump suggesting Canada should join the U.S. as the 51st state have raised geopolitical concerns, adding another layer of uncertainty to the economic landscape.