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Inflation in Canada: What Drives It Up, What Drives It Down, and Who Wins or Loses

Main drivers

What pushes inflation up

• Rising oil prices — Canada's consumer price index has a large energy component, so when global crude oil prices climb, gasoline costs pass through quickly to consumers and lift headline inflation.
• U.S. tariffs and trade conflict — Tariffs on Canadian goods raise the cost of imports directly and push oil prices higher through supply disruption fears, both of which feed into consumer prices.
• Geopolitical tensions and supply disruptions — Conflicts or sanctions involving major oil-producing regions tighten global supply, drive oil prices up, and raise Canadian energy costs.
• Shelter costs and mortgage interest — Rent increases and higher mortgage interest payments push up the shelter portion of inflation. Ironically, when the Bank of Canada raises rates to fight inflation, it also raises mortgage costs, creating a self-reinforcing loop.
• OPEC+ production cuts — When major oil-producing countries reduce output, global supply shrinks, oil prices rise, and Canadian gasoline costs follow.

What pushes inflation down

• Falling oil prices — When crude oil retreats, gasoline costs drop sharply, pulling headline inflation lower.
• China's economic slowdown — China is the world's largest crude oil buyer. When its economy weakens, global oil demand falls, prices decline, and Canadian inflation eases.
• OPEC+ production increases — When the oil-producing group adds supply to the market, prices fall and Canadian energy costs decline.
• Easing geopolitical tensions — When conflicts in oil-producing regions de-escalate, supply fears fade, oil prices drop, and Canadian inflation benefits.
• Bank of Canada rate hikes (with a lag) — Higher interest rates cool demand across the economy and eventually slow price growth, though the effect takes time and can temporarily raise shelter costs in the process.

Historical examples

When inflation increased

• Rising oil prices

  • April 2023 — OPEC's crude oil output cut pinned energy costs at stubbornly high levels. Transportation prices accelerated sharply, and headline inflation unexpectedly jumped to 4.4%.
  • January 2025 — Higher oil and natural gas prices drove consumer gasoline costs up 8.6% compared to the prior year. Transportation inflation surged to 3.4%, pushing the headline rate from 1.8% to 1.9%.

• U.S. tariffs and trade conflict

  • February 2025 — President Trump imposed a 25% tariff on all Canadian goods (10% on energy). Canada retaliated with tariffs on $155 billion worth of U.S. goods. Oil futures immediately rose above $73.50 per barrel on supply disruption fears, and within weeks the higher energy costs showed up in January 2025 inflation data.

• Geopolitical tensions and supply disruptions

  • Early 2025 — New U.S. sanctions targeted tankers transporting Iranian crude to China, threatening to remove 1.5 million barrels per day from global markets. Russian production also fell below its agreed quota. These supply pressures contributed to the oil price increases behind January 2025's inflation uptick.

• Shelter costs and mortgage interest

  • April 2023 — The Bank of Canada's rate-hiking cycle lifted mortgage interest costs 28.5% year over year and rent prices 6.1%, making shelter a dominant force in headline inflation.
  • November 2023 — Mortgage interest costs surged 29.8% year over year. Even though overall shelter prices decelerated slightly, this category kept headline inflation stuck at 3.1%.
  • January 2025 — Shelter inflation held at 4.5% even as headline inflation sat at just 1.9%, showing how sticky housing costs remained.

When inflation decreased

• Falling oil prices

  • June 2023 — Gasoline prices plunged 21.6%, dragging transportation costs down 3.4%. Headline inflation fell to 2.8%, the lowest since March 2021.
  • October 2023 — Gasoline prices dropped 7.8% after crude oil benchmarks retreated. Headline inflation fell from 3.8% to 3.1%.
  • September 2024 — Gasoline prices fell 10.7% due to lower crude oil prices. Headline inflation dropped to 1.6%, the lowest since February 2021.

• China's economic slowdown

  • Mid-to-late 2024 — Chinese oil consumption fell by 500,000 barrels per day in August, the fourth consecutive monthly decline. The International Energy Agency cut its demand growth forecasts. These demand-side pressures helped push oil below $70 per barrel and contributed to Canada's 1.6% inflation reading in September 2024.

• OPEC+ production increases and returning supply

  • September 2024 — OPEC announced plans to increase production in the fourth quarter. Libya's potential return of over 500,000 barrels per day of supply added further downward pressure on prices. Oil sank to December 2023 levels.

• Easing geopolitical tensions

  • October 2023 — Growing optimism that the Israel-Hamas war would not spread through the Middle East pushed oil down to roughly $80.50 per barrel. This contributed to the drop in Canadian inflation that month.
  • October 2024 — Israel signaled it might target military rather than energy infrastructure in Iran, easing fears of supply disruption. Oil fell 4.6%, supporting the decline in Canadian inflation to 1.6%.

Who benefits

When inflation rises

• Oil-producing regions and the energy sector — Higher oil prices, a key inflation driver, directly boost revenue for energy producers concentrated in provinces like Alberta.
• Holders of physical assets and commodities — Rising prices increase the nominal value of real assets like property and raw materials.
• Borrowers with fixed-rate debt — The real burden of their existing debt shrinks as prices rise faster than expected.

When inflation falls

• Consumers and households — Lower inflation means everyday costs like gasoline and groceries rise more slowly, stretching household budgets further.
• The housing market — Falling inflation leads to rate cuts from the Bank of Canada, which reduces mortgage costs and supports home values. New home prices had been declining as builders faced weakened demand from high borrowing costs.
• The manufacturing sector — Lower inflation allows rates to come down, reducing operating costs and reviving new orders. The sector had contracted for 15 consecutive months through mid-2024 under the weight of high rates and inflation uncertainty.
• The stock market — Rate cuts triggered by falling inflation boost equity valuations. After the July 2024 rate cut, the main Canadian stock index rose above 22,820 as investors responded to easier borrowing conditions.
• Bond holders — Falling inflation and the expectation of rate cuts push bond prices higher. The Canadian 10-year bond interest rate fell to 3.04% by August 2024 as inflation eased to multi-year lows.
• The banking sector — Lower rates reduce the risk of loan failures. At the end of 2023, high rates maintained to fight inflation had heightened the possibility of borrower defaults, and Canadian banks lagged behind their U.S. peers as a result.