You can decide for yourself. Although Guillermo del Toro believes it was all real he leaves it up to the audience to interpret different clues in the movie to decide for themselves.

The strongest piece of evidence that the events are all a figment of Ofelia's imagination is the fact that the Captain cannot see the Faun inside the labyrinth. Leading to the speculation that perhaps it really all was a dream made up by a little girl, as suggested by the Captain himself and eventually Ofelia's mother, caught in the middle of an emotional, psychological, and literal war zone. Since this is presented to the audience at the end of the movie during it's climax, it does an incredible job in dispelling the idea that the fantasy world could have been real, and reassures the already questioning that it might not have happened at all. However, del Toro says on the commentary that it just means that the Captain is incapable of seeing the Faun, not that the Faun doesn't exist.

Another piece of evidence pointing toward the imagination theory is that when something happens in Ofelias life a reaction shows up in the fantasy world. For instance: When Ofelia first meets the faun he appears to be friendly. Only after Mercedes tells her to be careful with fauns does it turn into a more ambiguous character. There is also the fact that the writings in her book appears when she touches it, which therefore could be suggesting that she herself writes the story. That the book does not reveal a quest when Ofelia's mother become ill, instead showing blood spreading over the page, is further testament to Ofelia having control over the fantasy, with her worry for her mother being more important than her fairytale. This could be read a different way, as it is the vision of blood that leads Ofelia to find her mother in pain, with the fantasy giving insight into the reality, but since the Faun expresses displeasure that Ofelia has not undertaken the task this does not seem right. Of course, this could be another element of the greater test, playing on Ofelia's loyalties.

The third possible piece of evidence of the Faun's world being an element of Ofelia's imagination is Ofelia's mother and baby sitting on a throne by the King of the Underground Realm. Though it is not said that Ofelia's mother, or a representation of her brother (who is living when Ofelia passes on) would not be there, the fact that they are makes the Underground realm seem overtly heavenly, with Ofelia's family (bar her real father, who we never see in the film) joining her in a paradise

But there are other coincidences, if one can call them that, in the movie that are constantly pushing for the fantasy world's existence. For example, the mandrake root that the Faun gives Ofelia. Ofelia's mother's health begins to improve almost immediately after Ofelia places it beneath her bed and completely deteriorates once it is thrown in the fire. Another good example, is that when the rebels and Mercedes break into Ofelia's locked and guarded room, Ofelia is missing and there is only a chalk drawing on the wall. It would have been impossible to escape from her room unnoticed since the room was being watched and the guards were told by the Captain himself to shoot her if anyone tried to get to her and one can assume she would have also been shot if she tried to escape. Furthermore, the rebels storm the Captains base after Ofelia has already entered the Captain's quarters, so she could not have sneaked away, taking advantage of the moments confusion, as some suggest.

Also the part near the end- as Ofelia runs through the Labyrinth away from Vidal, she comes to a dead end. However the walls of the labyrinth open and lead her directly to the opening. Vidal soon arrives and hits the same dead end, but with no Ofelia and no opening.

This has been debated with "Maybe there was an opening Vidal didn't see", however that wouldn't make sense. How would there be an opening straight through all of the walls, and how would a tired Ofelia notice over an enraged Captain?

All of the evidence for it being a fantasy world is ambiguous, and if we assume that it isn't, then the entire film takes an unreliable narrator approach due to all of the fantasy world that we do see, so any "real world" evidence, such as escaping the room, or the moving labyrinth should be taken as equally unreliable. Simply speaking, as the film is from Ofelia's perspective, what is told may simply be seen how she wishes to see it - ie perhaps she was hiding or found another way, and chooses to think and remember events as magical interventions.

Overall, the film has more power if you assume that it is Ofelia's imagination, and the fantasy world, even with all its dangers and cruelties, are an escape for Ofelia from the terrible things happening in her real world. There is also a greater tragedy and poignancy in Ofelia's death then, as even in her darkest moment, alone, dying, scared, she finds a peace in her mind where she has created a safe place, filled with love and acceptance.