Canada’s annual inflation rate, measured by the Consumer Price Index (CPI), fell to 1.6% in September from 2.0% in August — the first time since February 2021 that Canada’s inflation rate has dipped below the Bank of Canada’s 2% target. A large part of the slowdown came from lower gasoline prices, which were down nearly 10.7% year-over-year. While headline inflation has eased, many everyday costs remain elevated: over a three-year period rent has risen about 21.0% and grocery-store food prices about 20.7%, contributing to an overall CPI increase of roughly 12.7% since then.
What does inflation mean?
Inflation is the sustained rise in the general price level of goods and services, which reduces the purchasing power of money. In practical terms, when prices rise faster than your income, each dollar buys less than it did previously. For example, if a can of tomato sauce cost $5 last year and now costs $6.50, the same $10 buys fewer cans than before. If wages and other income sources do not keep pace with inflation, real purchasing power—and with it, living standards—declines.
What is a healthy rate of inflation?
Most central banks, including the Bank of Canada (BoC), target a modest and stable rate of inflation because small, predictable inflation is generally associated with a healthy economy. The Bank of Canada aims for 2% inflation, the midpoint of its 1%–3% control range. Inflation persistently below the target can signal weak demand and rising unemployment; inflation persistently above the target often indicates demand outpacing supply, which creates upward pressure on prices and can erode household purchasing power.
Why was inflation so high in 2023?
Inflation rose substantially in 2022 and 2023 for several interlinked reasons. During the pandemic the federal government introduced large economic support programs while the BoC purchased government bonds, increasing the money supply. Household savings and incomes rose for many Canadians during that period, and central banks cut interest rates to historic lows to avoid a deflationary spiral as jobs were lost. Meanwhile, global disruptions — including the war in Ukraine and pandemic-related production slowdowns in parts of the world — caused supply shortages for core commodities and other goods. The combination of more money chasing fewer available goods pushed prices higher.
How has the Bank of Canada responded?
To bring inflation back toward its 2% target, the Bank of Canada raised its policy interest rate sharply between March 2022 and July 2023, moving from 0.25% to 5%. Higher rates are intended to cool demand, slow price growth and reduce inflationary pressure. As inflation has moderated through 2024, the BoC began trimming rates: since June 2024 the benchmark rate has been lowered by 75 basis points, from 5% to 4.25%, and further adjustments are possible depending on incoming data and economic conditions.
How does inflation affect investments?
Inflation reduces the real value of investment returns. A nominal return does not account for rising prices: if a stock returns 5% over a year but inflation is 2%, the real return is approximately 3%. Evaluating investments using real returns — returns adjusted for inflation — gives a clearer picture of purchasing-power gains or losses.
Stocks
Rising inflation can squeeze corporate profits through higher input costs and can prompt central banks to raise interest rates, which raises borrowing costs. Sentiment-driven volatility is common during inflationary periods because investors may become risk-averse. However, strong, well-managed companies with pricing power can hold up better; market pullbacks can offer buying opportunities for long-term investors focused on quality names.
Bonds
Bond prices and inflation move inversely. When inflation expectations rise, existing fixed-rate bonds become less attractive and their market prices fall; conversely, when inflation drops or stabilizes, bond prices can recover. Short-term bonds are generally less sensitive to inflation shifts and can be a defensive place to hold capital while awaiting clearer signals on rate direction.
GICs
Guaranteed investment certificates (GICs) offer principal protection and fixed interest, which makes them attractive to conservative investors. When nominal interest rates are higher, GICs pay better rates than during low-rate periods. But if inflation outpaces a GIC’s interest rate, the investor’s real return can be negative. For savers who prioritize capital preservation, GICs remain a low-risk option compared with holding cash under the mattress.
ETFs
Exchange-traded funds (ETFs) provide diversified exposure to stocks, bonds or both. Broad market ETFs generally spread risk across many issuers and sectors, making them a sensible core holding for investors with long time horizons. During inflationary or volatile periods, balanced or inflation-resilient ETF strategies can help manage risk and maintain a diversified portfolio.
What to expect next
The September CPI reading marked a notable step toward the BoC’s 2% goal, but central bankers and economists remain cautious. Inflation can be volatile month to month, influenced by energy prices, housing costs and supply conditions. The BoC has indicated that it expects inflation to return sustainably to target only gradually, and it will adjust monetary policy as needed. For households and investors, that means staying alert to changes in interest rates, maintaining diversified portfolios and paying attention to real (inflation-adjusted) returns rather than nominal figures alone.
Further reading
- What does high inflation mean for your retirement savings?
- How has inflation affected Canadians’ finances in recent years?
- To save money, Canadians are buying more private-label grocery brands
- Compound interest calculator: How interest grows