February 20, 2026

Key takeaways:

• Inflation is cooling, reducing near-term risk and giving central banks flexibility to cut rates in the US and Europe.
• Long-term forces will likely keep inflation higher than the last cycle. Persistent deficits, deglobalization, and aging demographics suggest inflation may settle closer to 2.5–3.0%, not the 1.5% regime of the past decade.
• Markets remain supported. Stabilizing inflation is helping bonds, growth indicators are improving, earnings are resilient, and equity performance — particularly in Canada — reflects a constructive backdrop.

A key risk to the market outlook is a re-acceleration in inflation. The most immediate drivers are the delayed impact of tariffs, fiscal stimulus and lower interest rates. That said, inflation pressures are currently easing. Across major economies, recent readings have generally surprised to the downside, reinforcing that the 2022–2023 surge is gradually unwinding. As a result, central banks are regaining policy flexibility, with the bias in both the United States (US) and Europe shifting toward rate cuts.

A closer look at Canadian inflation

Canada reflects this broader cooling trend. Headline inflation is now 2.3% year-over-year. More importantly, underlying measures of core inflation have softened meaningfully, with one key gauge now running below 2.0%. 

That said, inflation slowing does not mean prices are falling. The level of prices — especially for rent, groceries, and fuel — remains materially higher than before the pandemic. For households, the strain feels persistent because essentials absorbed much of the increase.

Longer-term inflation pressures remain

While the near-term trajectory is encouraging, the long-term backdrop has changed in the developed world. Persistent fiscal deficits are the most important structural risk. The developed world continues to run historically large budget shortfalls, even outside of recession. Sustained deficit spending injects ongoing demand into the economy and may keep inflation modestly above target over time.

In addition:

• Deglobalization and reshoring raise production costs.
• Industrial policy and defense spending support demand.
• Aging demographics tighten labour supply.
• Elevated public debt increases incentives to tolerate somewhat higher inflation.

These forces suggest inflation may settle in a 2.5%–3.0% range over time rather than returning to the 1.5% environment that defined much of the 2010s.

Implications for the market

The cyclical cooling in inflation is helping stabilize bond markets. Investment grade bonds are benefiting from lower yields, which have supported price gains. Emerging market debt has also performed well, aided by an improving global growth backdrop.

Equities have responded positively. The S&P/TSX Composite is up more than 6% year-to-date, led by strength in materials and energy. In contrast, the US market is roughly flat, reflecting its heavier concentration in Artificial Intelligence (AI)-related stocks, which have declined modestly this year.

The takeaway: the market outlook remains supportive. Inflation is cooling, economic growth indicators are improving and earnings remain resilient.

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