Inflation has cooled, but the price level has not
Corrado Tiralongo - May 22, 2026
Market Commentary — May 11, 2026
Inflation has cooled, but the price level has not
The inflation debate has shifted, but households have not moved on.
Central banks, economists and markets tend to talk about inflation as a rate of change. On that basis, the worst of the post-pandemic inflation shock has faded. The more important issue now is not whether prices are still rising at the same pace, but that they are rising from a much higher base.
For households, that distinction matters. Inflation can slow, while the cost-of-living shock remains.
Canada has not avoided the inflation shock. It has absorbed it differently.
Consumer prices are now roughly 23% above their 2019 average1. That is a significant increase, even if it is somewhat less severe than the cumulative price gains seen in the U.S., the U.K. and Europe. The inflation shock may have cooled, but the cost-of-living shock has not disappeared.
At the same time, the Canadian story is not only about higher prices. Wages and income have provided more of an offset than the household mood might suggest. Real household disposable income per capita is roughly 5% above its Q4 2019 level2. That does not mean households feel comfortable. It means Canada’s inflation experience has been shaped by both sides of the ledger: prices have risen sharply, but incomes have not been standing still.
The issue is that averages hide a lot. Higher-income households with assets, wage growth or exposure to energy and financial markets have been better positioned to absorb the shock. Lower and middle-income households, renters and those more exposed to food, shelter and transportation costs have felt the squeeze more directly. The inflation rate may have normalized, but the lived experience remains uneven.
There is also an important distinction between categories. Fuel prices can move down as quickly as they move up. Most other prices do not. A decline in gasoline prices may provide some relief, but it does not reverse the broader cost-of-living shock embedded across shelter, services, food and other household expenses.
Canada sits between the U.S. and Europe
Canada’s position is better than Europe’s, but not as strong as the U.S.
The U.S. has been the clear outlier among major developed economies. Stronger productivity growth, more resilient household income and a more dynamic labour market have helped cushion the impact of higher prices. Europe, by contrast, faced a much harsher terms-of-trade shock from the 2022 energy crisis, weaker productivity and a more direct hit to real incomes.
Canada sits somewhere in the middle.
This is partly encouraging. Canadian households have not experienced the same real income squeeze as many European households. But it is also somewhat disappointing given Canada’s position as a net energy exporter.
In theory, high oil prices in 2022 should have provided a more visible lift to Canadian household incomes. Canada is a net energy exporter, so stronger oil prices improve national income, support corporate profits and increase government revenues. But the pass-through to households has been more muted than the textbook case would imply. Since the late 2010s, a larger share of oil and gas cash flow has been returned to shareholders, many of whom are outside Canada, while a smaller share has been reinvested into domestic operations. That has weakened the link between higher oil prices, domestic investment, employment and wage growth.
This is an important lesson for the current environment. Canada still benefits from elevated oil prices, but the benefit is less automatic, less broadly distributed and more dependent on fiscal policy and corporate reinvestment decisions.
Population growth has also complicated the picture. Canada’s population growth has been exceptionally strong over the past five years. That has supported aggregate demand and helped sustain economic activity, but it has also weighed on per capita income measures.
That surge is now reversing. Slower population growth should reduce some pressure on per capita income measures over time, but it may also reduce one of the supports that helped the economy absorb higher rates and higher prices.
Energy is both a cost and a source of income
The current environment brings Canada back to the same basic question: how does an energy price shock flow through the economy?
For energy-importing economies, the answer is more straightforward. Higher oil prices act like a tax.
Canada’s position is more complicated.
Higher gasoline and diesel prices still hurt households and businesses. The pain is immediate and visible. If the shock is large enough or persistent enough, it can feed into inflation expectations and wage demands.
But higher oil prices also improve Canada’s terms of trade. They support energy-sector profits, increase government revenues and can strengthen national income.
The challenge is timing and distribution. The costs arrive quickly. The benefits are indirect.
The trade data reinforces the same point. Canada’s goods trade balance moved back into surplus in March, helped by higher oil prices and a rise in gold exports. However, total export volumes declined and import volumes also fell.
This is the Canadian transmission problem in real time. The consumer cost is visible immediately, while the income benefit shows up unevenly.
The real test is breadth and persistence
The next inflation print matters less than the transmission path behind it.
If higher oil prices remain concentrated in fuel and transportation, the effect is manageable. If the shock persists and broadens, the inflation risk becomes more serious.
The labour market matters in that process. Canada’s unemployment rate has moved higher, employment has weakened and wage growth looks less concerning.
The fiscal offset helps, but it does not remove the risk
Higher oil prices can improve Canada’s fiscal position, at least initially, by increasing corporate tax receipts and government flexibility.
But this depends on the type of shock. Demand-driven oil price increases can be broadly positive, while supply disruptions can lead to weaker growth and tighter financial conditions.
Canada has some insulation because it is a net energy exporter, but it does not have immunity.
Portfolio positioning: resilience over prediction
For portfolios, the key issue is not whether inflation has been defeated, but whether the price shock alters growth, rates and earnings.
In our view, this environment supports balanced portfolio construction rather than a single macro call on oil or inflation.
Within equities, we emphasize quality, cash-flow discipline and margin resilience. In fixed income, we view the asset class as a source of stability as the rate cycle matures.
The broader point is that inflation has slowed, but the price level has not reset. The focus should be on whether higher prices flow through to incomes, investment and confidence, or become an ongoing burden on households.
Corrado Tiralongo
Vice President, Asset Allocation & Chief Investment Officer
Canada Life Investment Management Ltd.
1 Statistics Canada
2 Statistics Canada