The MoneySense guide to inflation (2025)

Inflation is the increase in the cost of goods or services. Governments use this valuable information to set monetary policy. In turn, lenders and banks also rely on inflation numbers to set interest rates, and borrowers use them to make investment or budgeting goals.

We’ll explain how inflation is measured in Canada and what it means for your wallet, before considering where inflation is headed. 

What is inflation, and why does it happen?

Inflation is the increase in the price of goods over a set period of time (usually a year), meaning your dollar doesn’t hold as much value as it used to. Typically, inflation refers to a broad range of goods, not just one type of product.

Economists and government officials look at inflation to gauge consumer purchasing power. This also helps officials set monetary policy, which affects borrowing rates.

Although the causes of inflation change along with the rate of inflation, these are common types of situations that lead to inflation: 

Quantity theory of money: Inflation is the result of lax monetary policy in which the money supply is too large (relative to the economy of the country). Because there’s too much currency in circulation, it has less value. Supply shocks: Sudden changes in supply or demand can be caused by natural disasters, rising food costs, or labor issues, disrupting production. This is also known as “cost-push” inflation. Demand shocks: If monetary policy changes, like when interest rates are lowered, it can stimulate spending and cause demand that can’t be met. This is also known as “demand-pull” inflation. 

Inflation can be challenging to manage since consumer expectations also drive it. If widespread opinion is concerned about higher costs or increased consumer demand, businesses might change their budgets, which can actually contribute to inflation going forward.

How inflation is measured in Canada

Economists look at the Consumer Price Index (CPI) to measure changes in the cost of goods. They study the costs of a basket of goods across multiple categories. We’ve listed the inflation rate for each specific category for September 2025:

Food: up 3.8% year over year Shelter: up 2.6% year over year Household operations, furniture, equipment: up 2.4% year over year Clothing and footwear: up 0.8% year over year Transportation: up 1.5% year over year Health and personal care: up 2.6% year over year Recreation, education, and reading: up 1.6% year over year Alcohol, tobacco, and recreational cannabis: up 1.5% year over year

Of these categories, food, housing, and health care saw the largest increases in inflation from 2024 to 2025.

How inflation impacts your wallet

Canadians see the effects of inflation when buying goods or paying for services, but inflation can also impact borrowers, savers, and retirees. Since it’s a major driver of Canada’s monetary policy, it affects almost everything related to finances.

When inflation is high, borrowers might see higher interest rates on mortgages, personal loans, and car loans. Plus, they’ll also pay more in credit card interest. Retirees who are on a fixed income might also find it hard to pay for everyday expenses that cost considerably more than they used to—especially if the cost-of-living adjustments don’t keep up with inflation.

Savers and investors aren’t safe from inflation either. Because the dollar isn’t worth as much when inflation is high, you won’t earn as large a return on your investments or savings accounts. As interest rates rise, existing fixed-rate bonds lose out on returns. In fact, any inflation-linked investment loses earning potential when inflation is high.

The CPI and the Bank of Canada’s rate changes

COVID-19 brought the global economy to the brink of a standstill. In response to pandemic-related “negative shocks” to the Canadian economy, the Bank of Canada cut its benchmark rate three times in March 2020, dropping from 1.75% to 0.25%. By early 2022, however, rapidly rising inflation prompted the Bank to start hiking its rate, which it did 10 times between March 2022 and July 2023. 

Canadians didn’t see rate relief until June 2024, when the Bank cut its rate from 5% to 4.75%. Two more quarter-point cuts followed in July and September 2024, and two more cuts closed out 2024.

2025 started with inflation at 1.7%, under the target goal of 2%. Although it briefly spiked in February, the inflation rate dropped during the summer. Inflation again rose above 2.6% in September, leading the Bank of Canada to cut interest rates by a quarter-point in September and October.

What’s next for inflation in Canada?

Economists expect weak economic growth over the next few years as exports and business investments dropped in Quarter 2 this year. The labour market also faces challenges as hiring has slowed. However, real estate and government spending are expected to provide steady growth throughout the year.

For now, the Bank of Canada seems comfortable with keeping interest rates around 2.5%. However, if ongoing challenges in the labour market lead to increased inflation, it’s said that it will consider another quarter-point cut in early 2026.

Inflation is difficult to predict, but you can make your finances more resilient against economic shocks by following a good budget and tracking your spending. Now is a good time to cut unnecessary spending, delay large purchases,  and pay down debt, which can save you on interest if rates climb. It’s also a good idea to contribute to your emergency fund and invest in your retirement accounts.

FAQs

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