Inflation cools to 2.3%, but grocery and restaurant bills still squeeze Canadian families — Here's how investors and retirees should react

While the Statistics Canada report confirms that headline inflation is now close to the Bank of Canada’s 2% target, the details within this report show a more complicated picture for Canadian households.

Gas prices drive the slowdown

The biggest factor pulling inflation lower was gasoline. Pump prices fell 16.7% y-o-y in January, a larger decline than in December.

That drop helped bring down overall inflation, even though many other categories remain elevated.

For commuters and families managing transportation costs, this drop in petrol prices means real relief. This relief, however, does not transfer over to investors and policymakers, who look beyond gasoline prices and must factor in the volatility of energy prices.

It also meant that without the drop in gas prices — and excluding gasoline from CPI calculations — inflation was 3.0% in January.

But gas wasn’t the only outlier.

Grocery inflation remains high

Food purchased from stores rose 4.8% year over year in January, slightly slower than December’s 5.0% pace.

Fresh fruit prices declined 3.1%, helping moderate overall grocery inflation, but many other food categories remain elevated.

For retirees on fixed incomes and families with growing teens, food inflation continues to outpace overall inflation. The stark reality is that food inflation erodes purchasing power.

If food and energy were excluded from CPI calculations, then inflation was closer to 2.4% in January.

What this suggests is that underlying price pressures are still somewhat sticky.

Shelter inflation drops below 2% for first time in nearly five years

Shelter costs rose 1.7% year over year in January — the first time since early 2021 that shelter inflation fell below 2%.

• Rent increased 4.3%, slowing from 4.9% in December
• Mortgage interest costs rose 1.2%, continuing a steady deceleration that began in late 2023

For homeowners renewing mortgages in 2026, this trend matters. Slower mortgage interest growth reflects the impact of earlier Bank of Canada rate cuts (2), even if the latest BoC rate announcement held the overnight rate at 4.25%, in January 2026 (following a series of cuts that began in mid-2024).

If shelter inflation continues to ease, it strengthens the case for further rate stability — or potential cuts later in 2026.

For home buyers, slower shelter inflation may signal a more balanced housing market. However, affordability challenges remain, particularly in major urban centres.

The GST/HST break is distorting comparisons

One unusual factor in January’s data is the temporary GST/HST break that ran from Dec. 14, 2024, to Feb. 15, 2025, affecting roughly 10% of the CPI basket.

Because prices were artificially lower in January 2025, some categories now show sharp year-over-year increases, including:

• Restaurant meals: +12.3%
• Alcoholic beverages from stores: +7.9%
• Alcoholic beverages in licensed establishments: +9.0%
• Toys and hobby supplies: +8.7%
• Children’s clothing: +6.3%

These increases are partly a base-year effect rather than fresh inflation pressure. Still, families will notice higher restaurant and discretionary spending costs compared with last winter (3).

Regional differences (of a national situation)

Prices rose at a slower pace in nine provinces compared with December. The one exception was in British Columbia, where price growth accelerated. While BC residents may want to blame the high cost of living, the real reason was not surging prices, but base-year effect tied to hotel pricing from last year. In other words, even if BC hotel prices were normal in 2026, they’d appear to be elevated relative to last year’s depressed price level. Since hotel prices were unusually low in January 2025, the prices recorded in January 2026 look as if there’s been a large increase, by comparison.

Why does this matter? Because for Canadians considering relocation or retirement planning, regional inflation trends can make or break a decision to relocate. Provinces with slower rent growth may offer relative cost advantages for retirees or remote workers — and prompt relocation decisions in order to create more wiggle room in the household budget.

What the latest CPI report means for investors

For investors, January’s CPI reinforces three significant factors that need to be considered over the next few months:

1. Inflation is near target — but not fully tamed

At 2.3%, inflation is close to the Bank of Canada’s 2% goal. But core measures between 2.4% and 3.0% suggest underlying pressures remain.

This reduces the urgency for aggressive rate cuts.

2. Fixed income looks more stable

With inflation moderating and mortgage interest growth slowing, bond markets may benefit from a more predictable rate environment.

3. Equity sectors respond differently

Lower gasoline prices may weigh on energy stocks, while easing shelter inflation could support consumer discretionary spending later in the year.

What investors should do in the next few months

What does all of this mean for investors? For most investors, it means focusing on a steady shift in portfolio planning (not a dramatic departure).

For Canadians who are five to 10 years away from retirement, the current BoC rate holds (and the steady inflation rate) means focusing on the protection of capital without abandoning growth. For most this means a portfolio that focuses on diversification (rather than short-term rate timing). A good strategy is to keep cash reserves available to either weather volatility (and prices increases) around future rate announcements — and to use if opportunity presents itself in the equity market.

It also means no longer ignoring (or minimizing) the role bonds play in a portfolio.

For the first time in year, fixed income offers:

• Positive real yields (after inflation)
• Lower volatility than equities
• Potential price gains if rates drift lower

For those already using bonds as part of their retirement planning, consider gradually extending the duration of bond terms — moving from ultra-short-term bonds, GICs or money market funds into short- or mid-term bonds and bond ETFs.

If possible, consider building a bond or GIC ladder — a cascade of bonds or GIC that mature at an escalating timeframe. This allow retirees to maintain guaranteed income, while maintaining flexibility.