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Economic Viewpoint

Have Government of Canada Deficits Boosted Canadian Inflation? Yes, But Not Much

January 15, 2026
Randall Bartlett
Deputy Chief Economist
  • There has been a lot of debate regarding the impact of Government of Canada deficits on Canadian inflation. Indeed, some have attributed much of the heightened inflation in 2021, 2022 and 2023 to them. 
  • However, while we find that federal deficits have some impact on inflation, this has tended to be quite limited when the state of the economy, supply chain disruptions and other factors are accounted for. Even during the recent period of high inflation and large deficits, the federal government’s budget balance explained about 10% of above‑target inflation once the state of the economy is considered (graph 1). Supply chain disruptions and higher oil prices contributed much more to the sharp increase in inflation, particularly in recent years. 
  • Looking forward, even though federal deficits are largely unrelated to the state of the economy, we don’t expect them to make a substantial contribution to inflation. That’s because it’s the change in the deficit that matters more than the level itself, and the federal government is projecting deficits to shrink as a share of the economy over the medium term.
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