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 average(1). 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 level (2). 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.
That 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. The economy grew, but the number of people sharing in that growth rose quickly as well.
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. The arithmetic improves, but the growth backdrop may become less forgiving.
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. They lift fuel costs, reduce disposable income, pressure business margins and weaken real purchasing power.
Canada’s position is more complicated.
Higher gasoline and diesel prices still hurt households and businesses. The pain is immediate and visible. Households see it at the pump. Businesses see it in transportation and input costs. 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. That gives Canada a partial offset that many other developed economies do not have.
The challenge is timing and distribution. The costs arrive quickly. The benefits are indirect. A household paying more for gasoline does not feel better because national income has improved. A small business facing higher transportation costs does not experience relief because corporate tax receipts have increased. The benefit only becomes meaningful if it flows through to wages, employment, investment or fiscal support.
Recent labour market data reinforces that point. The apparent employment boost from higher oil prices has not been durable. Natural resource payrolls fell in April and hiring in Alberta was broadly flat, even as oil prices remained elevated. At the same time, some discretionary sectors appear to be feeling pressure from higher gasoline prices and weaker consumer confidence.
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 sharp rise in gold exports. That looks constructive at first glance, but the underlying details were weaker. Total export volumes still declined and import volumes also fell. In other words, the headline improved, but not because the broader export sector suddenly strengthened or domestic demand accelerated. Higher energy prices are lifting parts of the national income picture, but the benefit is still narrow and uneven.
That is the Canadian transmission problem in real time. The consumer cost is visible immediately, while the income benefit shows up unevenly across corporate profits, trade balances and fiscal revenues before it is felt more broadly by households.
This is where policy matters.
The temporary suspension of the federal fuel excise tax is one example of how higher energy-related revenues can be recycled back to households. It does not eliminate the cost of higher oil, but it softens the blow. It also highlights a broader point: Canada’s energy advantage is not automatic. It depends on how revenues are distributed and whether the windfall supports domestic incomes and productive investment.
The real test is breadth and persistence
The next inflation print matters less than the transmission path behind it.
A temporary lift to headline inflation through energy is not the same as a broad inflation shock. Central banks can generally look through a short-lived fuel-price spike if it does not spread. The risk changes when higher energy costs move into wages, services inflation and inflation expectations.
That is the test now.
If higher oil prices remain concentrated in fuel and transportation, the effect is uncomfortable but manageable. If the shock persists, broadens and changes wage-setting behaviour, the inflation risk becomes more serious.
The labour market matters in that process. Wage growth and inflation expectations become more dangerous when labour markets are exceptionally tight. That was part of the problem earlier in the post-pandemic cycle. It is less clearly the case today. Canada’s unemployment rate has moved higher, employment has weakened, and underlying wage growth looks less concerning once compositional effects are stripped out.
That does not eliminate inflation risk, but it reduces the likelihood that a temporary energy shock automatically turns into a wage-price spiral.
This gives policymakers some room to look through a temporary energy-driven inflation spike. It does not give them room to ignore a broader inflation impulse if one develops.
For Canada, the key question is whether energy prices remain a relative income support or become another drag on already strained households.
The fiscal offset helps, but it does not remove the risk
Higher oil prices can improve Canada’s fiscal position, at least initially. Stronger energy-sector profits can raise corporate tax receipts and provide governments with more flexibility. That can help fund affordability measures or reduce pressure on the deficit.
But this is not a free lunch.
The fiscal benefit depends on the type of oil shock. If prices rise because global demand is firm and Canada attracts investment into secure energy supply, the impact can be broadly positive. Higher profits, stronger investment, better employment and improved government revenues can reinforce one another.
If prices rise because of a supply disruption or geopolitical shock, the outcome is less favourable. The initial revenue benefit may still be there, but it can be overwhelmed by weaker global growth, tighter financial conditions, lower confidence and pressure on household spending.
Higher oil prices are helpful for Canada only when the income channel dominates the cost channel. They become damaging when the consumer squeeze, inflation risk and growth hit dominate the revenue benefit.
That distinction matters in the current environment. Canada has some insulation because it is a net energy exporter. It does not have immunity. The fiscal channel can offset part of the shock, but it cannot fully protect households from a permanently higher cost base.
Canada Life Investment Management portfolio positioning is about resilience, not a single oil call
For portfolios, the issue is not whether inflation has been defeated. It is whether the price shock changes the path of growth, rates and earnings.
At this stage, the evidence does not point to a broad inflation reacceleration in Canada. The more likely near-term impact is a temporary lift to headline inflation through energy, partly offset by fiscal relief and Canada’s terms-of-trade benefit. The softer labour market reinforces that view, although it also leaves less room for households to absorb another sustained increase in energy and transportation costs.
In our view, this continues to support a balanced portfolio construction lens rather than a single macro call on oil or inflation.
Within our equity exposure, we continue to emphasize quality, cash-flow discipline and margin resilience, particularly where higher input costs can pressure earnings. In fixed income, we continue to view the asset class as an important source of portfolio stability as the rate cycle matures, while remaining mindful that renewed inflation volatility can affect duration exposure. Our use of real asset and resource-linked exposures reflects the view that supply shocks, fiscal pressure and geopolitical risk are likely to remain more frequent than in the pre-pandemic cycle.
The broader point is that inflation has slowed, but the price level has not reset. Canada has handled the adjustment better than many energy-importing economies, but less well than one might expect from a net energy exporter.
The difference lies in transmission.
The focus should be on whether higher prices flow through to incomes, investment, fiscal capacity and confidence, or whether they simply become another squeeze on households already living with a permanently higher cost base.
Sincerely,
Corrado Tiralongo (he/him)
Vice President, Asset Allocation & Chief Investment Officer
Canada Life Investment Management Ltd.
1 Statistics Canada
2 Statistics Canada
The views expressed in this commentary are those of Canada Life Investment Management Ltd. as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their financial security advisor for advice based on their specific circumstances.
This material may contain forward-looking information that reflects our or third-party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of May 11, 2026. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.
Investment Planning Counsel and the Investment Planning Counsel logo are trademarks of Investment Planning Counsel Inc.
