Inflation
Learn what inflation is, how Canada measures it with the CPI, and how it affects your small business.
February 2024 | Published by Xero
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Inflation is the rate at which prices rise over time, based on the average price changes of everyday goods and services.
- In Canada, inflation is measured by the Consumer Price Index (CPI), which Statistics Canada publishes each month.
- Canada's CPI rose 2.8% year over year in June 2026, easing from 3.2% in May, and the Bank of Canada aims to keep inflation near 2%.
- Inflation raises your costs and can soften customer demand, so watching your margins and cash flow helps you respond early.
What is inflation?
Inflation is the rate at which prices rise over time. It's measured by the average price changes of a range of goods and services.
Prices climb when demand outpaces supply, when the cost of producing goods goes up, or when there's more money circulating in the economy. A little inflation is normal in a healthy economy, but fast inflation is hard for small businesses to plan around.
What causes inflation?
Inflation usually comes from one of a few pressures on prices. Economists group these into three common types.
- Demand-pull inflation: prices rise when demand for goods and services outstrips what the economy can supply
- Cost-push inflation: prices rise when the cost of production goes up, such as higher wages or materials
- Built-in inflation: prices rise as workers seek higher wages to keep up with living costs, and businesses pass those costs on
What is the inflation rate?
The inflation rate is the percentage that prices rise over a set period, usually a year. It's reported as a single headline figure, but the rate varies by category, so energy might climb faster than food.
How to calculate the inflation rate
You can work out the inflation rate for a single item with a simple calculation. Subtract the old price from the new price, divide that difference by the old price, then multiply the result by 100 to get a percentage.
How is inflation measured in Canada?
Canada measures inflation using the Consumer Price Index (CPI), which tracks the price of a fixed basket of goods and services that households buy. Statistics Canada publishes the CPI each month.
The Bank of Canada monitors inflation and targets 2%, the midpoint of a 1% to 3% range. Canada's CPI rose 2.8% year over year in June 2026, easing from 3.2% in May.
Inflation vs deflation
Deflation is the opposite of inflation: a sustained fall in average prices across the economy. It sounds helpful, but it often signals weak demand and can point to deeper economic trouble.
Disinflation is different again. It means prices are still rising, just more slowly than before.
Why inflation matters to small businesses
Inflation can work in your favour at times, since it lifts the value of some assets and erodes the real value of money you've borrowed. More often, though, it creates challenges you need to manage.
- Passing on costs is hard: raising your prices to match rising costs risks losing price-sensitive customers
- Demand can soften: customers tend to cut back on discretionary and nonessential spending
- Borrowing gets pricier: central banks often lift interest rates to cool inflation, which raises your cost of credit
How small businesses can deal with inflation
You can't control inflation, but you can control how your business responds to it. A few practical moves help protect your margins and cash position.
- Cut expenses: find lower-cost suppliers, renegotiate leases, and reduce elective spending
- Watch your margins: monitor your gross profit margin and adjust pricing when costs move
- Raise prices strategically: lift prices where the market allows, and offer flexible payment terms to loyal customers
- Protect cash flow: keep enough liquidity on hand so you avoid taking on costly debt
Track your finances through inflation with Xero
When prices are moving, you need a clear view of where your money goes. Xero brings your costs, margins, and cash flow together in one place, so you can spot pressure early and adjust with confidence.
Real-time reporting and cash flow tools help you make decisions based on today's numbers, not last quarter's. Try it and get one month free.
FAQs on inflation
Here are answers to some frequently asked questions about inflation and what it means for your business.
What is a good inflation rate in Canada?
The Bank of Canada aims to keep inflation near 2%, the midpoint of its 1% to 3% target range. A rate in that band is generally seen as healthy for the economy.
What's the difference between inflation and the cost of living?
Inflation is the rate at which prices rise across the economy, while the cost of living is what you actually spend to maintain a certain standard in a given place. Two cities can share the same inflation rate but have very different living costs.
How does inflation affect small business loans?
Central banks often raise interest rates to slow inflation, which makes new borrowing more expensive. If you hold a fixed-rate loan, inflation can quietly reduce the real value of what you repay over time.
Can inflation ever be good for a business?
Moderate inflation can let you raise prices gradually and can shrink the real value of existing debt. It becomes a problem when it's fast or unpredictable and your costs climb faster than your revenue.
Related terms
Learn more about inflation
Handy resources
Advisor directory
You can search for experts in our advisor directory
Price increases
Learn how to increase prices successfully
Business analytics with Xero
See future cash flow, check financial health and track metrics
Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.