Canada’s Inflation Falls to 1.8%—Could Oil Prices Reverse the Trend?

Canada’s inflation rate showed signs of easing in February, offering a brief sense of relief for households and policymakers alike. However, that relief may be temporary. A sharp surge in oil prices—triggered by escalating conflict in the Middle East at the end of the month—has yet to be reflected in the latest data. As a result, the current inflation figures may not fully capture the growing economic pressures faced by Canadians in the months ahead, clouding Canada’s inflation outlook.

What Is Canada’s Inflation Rate & Outlook?

Canada’s annual inflation rate eased to 1.8% in February from 2.3% in January, which was slightly lower than economists’ predictions of 1.9%.

Part of the reason for the big decrease is the GST tax holiday that ended in mid-February 2025. If you exclude the effect of the tax break, the February Consumer Price Index (CPI) climbed to 1.9% on an annual basis.

However, despite February’s easing, Canada’s inflation outlook is uncertain.

Canadians are still feeling the pinch when it comes to food prices due to grocery prices rising faster than overall inflation, supply chain issues, and bad weather. Grocery prices were up 4.1% in February after rising 4.8% in January. Over the last five years, though, grocery prices have climbed 30%.

On the plus side, shelter costs, the largest component of the CPI with a weight of approximately 29%, rose at a slower pace of 1.5%. This is largely a result of lower mortgage costs.

Gasoline prices fell 14.2% thanks to the removal of the carbon tax on fuel, which resulted in the price declining on an annual basis. Still, gasoline prices remain elevated due to crude oil prices rising since the start of the year.

Canadians can expect any inflationary relief to be short-lived as the war in the Middle East rages on. Since Israel and the U.S. started shelling Iran on February 28, crude oil prices have surged from $65.00 per barrel to more than $100.00 per barrel. And the war in Iran shows no signs of ending anytime soon.

Gas prices have jumped as much as 15%. Of course, higher gas impacts virtually every corner of the economy. More money going to filling up vehicles cuts into consumer spending. Groceries and other products also get delivered by trucks, which also need gas, so those added costs get passed down to Canadian consumers.

Where Will Canada’s Interest Rates Go?

The Canadian economy is already facing serious headwinds. In February, Canada shed 84,000 jobs, with the unemployment rate ticking up to 6.7%. Economists were calling for the Canadian economy to add 10,000 jobs. It was, as one economist called it, a “bloodbath.” In fact, this February ranks as one of the worst months for jobs, outside of the pandemic, ever.

Canada has lost more than 100,000 full-time jobs since the start of the year. Over the last year, the Canadian economy has experienced virtually no job growth. This is expected to put pressure on the Bank of Canada and the direction of its key lending rate, which directly impacts interest rates.

Despite the weak jobs data and expected rise of inflation, markets are still pricing in at least one interest rate hike later this year. However, in light of the worrisome economic data, chances are good the Bank of Canada will hold its interest rates at 2.25% throughout 2026.

Admittedly, it looks bad for the Canadian economy, but things are expected to improve this summer, thanks in large part to infrastructure investments and the long-awaited Canada-U.S.-Mexico trade agreement (CUSMA) review deadline on July 1.

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