When Energy Inflation Doesn't Spread (And Why the Bank of Canada Is Watching Food)

Canada's headline inflation hit 3.2% in May 2026, the highest reading since December 2023. Gasoline prices jumped 33.2% year-over-year, the biggest spike since July 2022. If you just looked at the headline number, you'd think inflation was spreading across the economy again.

But Bank of Canada Governor Tiff Macklem says that's not what the data shows. Speaking in Paris after the May CPI release, he pointed out that the inflation spike is almost entirely concentrated in energy-related categories. Gasoline, jet fuel, air fares, travel costs, all tied to the global oil shock. Core inflation measures, the ones that strip out volatile categories like energy and food, didn't move at all. The Bank tracks what percentage of CPI components are rising faster than 3%, and right now that's sitting near historical averages. In other words, the spike is isolated, not generalized.

That distinction matters because the Bank of Canada's job isn't to react to every price move. It's to prevent inflation from becoming embedded across the economy. Macklem said they're willing to "look through" energy price spikes as long as they don't start bleeding into other goods and services. Monetary policy needs to be nimble, he said, which is central bank speak for "we're not raising rates just because gas got expensive."

The recent US-Iran agreement to re-open the Strait of Hormuz and extend the ceasefire is already pushing global oil prices lower, which reduces the risk of persistent inflation from this particular shock. The Bank is working on updated projections for the July Monetary Policy Report, and that drop in oil prices will factor in.

Food is a different story. Grocery prices rose 4.3% year-over-year in May, driven mostly by fresh fruit and vegetables. Food inflation has been running hotter than headline inflation for 16 consecutive months, and the Bank's own data shows grocery prices are up 22% since 2022. That's a cumulative hit that doesn't reverse when gas prices come down.

Macklem said they're still trying to figure out what's driving the grocery spike. Is it transportation costs? Climate-related supply shocks? Some combination? The problem is that food inflation hits lower-income households harder because they can't scale back spending on groceries the way they might on discretionary purchases. The Bank had started to see some relief in food inflation earlier this year, but May's data showed it ticking back up.

This is where the "looking through" approach gets complicated. Energy shocks are temporary and predictable. Food shocks, especially if they're driven by climate or structural supply issues, are neither. If grocery inflation stays elevated for another six months, the Bank might have to rethink its stance, even if core inflation stays anchored.

The key signal here is the spread between headline inflation and core inflation. As long as that gap stays wide and core measures stay flat, the Bank of Canada is probably going to hold rates steady or even cut if the economy softens. But if you start seeing trim and median CPI (the Bank's two favorite core measures) start climbing, that's when policy turns more restrictive.

The other thing to track is the proportion of CPI components rising faster than 3%. Macklem specifically called this out as a sign of whether inflation is spreading. If that percentage starts climbing above historical norms, it means price pressures are broadening, and the Bank will have to respond.

For commodity traders, especially in energy, the Iran ceasefire and the Strait of Hormuz reopening are already in the price. Oil dropped hard on that news, and unless there's another geopolitical flare-up, the energy-driven inflation spike is probably done. The recent US-Iran conflict showed how quickly geopolitical risk premiums can reverse once tensions ease.

Food commodities are harder to read. If you're trading agricultural futures or Canadian food stocks, you're dealing with supply-side uncertainty that doesn't respond to central bank policy. Climate effects, transportation bottlenecks, and input costs (fertilizer, diesel) are all structural issues that take time to work through.

Central banks differentiate between inflation shocks they can control and ones they can't. Energy price spikes from geopolitical events fall into the second category. As long as those shocks don't spread to wages, services, and other goods, they get ignored. The risk is when temporary shocks become permanent through second-round effects, like workers demanding higher wages to offset gas and grocery costs, which then forces businesses to raise prices across the board.

Canada's labor market is still tight, but wage growth has been moderating. That's probably why Macklem feels comfortable looking through the headline inflation number. If wage growth started accelerating again, or if businesses started raising prices across more categories, the calculus changes.

The July Monetary Policy Report will be the real tell. The Bank will update its inflation forecasts, factor in the oil price drop, and give a clearer picture of where they think food inflation is headed. If they downgrade the inflation outlook, rate cuts become more likely later this year. If they keep the inflation forecast elevated because of persistent food prices, rates stay higher for longer.

The base case is that energy inflation fades, core inflation stays anchored, and food inflation eventually moderates. But there are a few ways this could play out differently.

First, oil prices could spike again. The Iran ceasefire is fragile, and if tensions flare up in the Middle East or if OPEC decides to cut production, energy inflation comes roaring back. That would force the Bank to reconsider its "look through" approach, especially if the spike lasts more than a few months.

Second, food inflation could stay elevated longer than expected. If climate shocks keep hitting agricultural supply, or if transportation costs stay high because of fuel prices or supply chain issues, grocery inflation becomes structural rather than cyclical. That's harder for the Bank to ignore, especially with an election coming up and food prices being a major political issue.

Third, wage growth could accelerate. If workers start demanding higher pay to offset grocery and gas costs, and businesses pass those costs on to consumers, you get the second-round inflation effects that central banks actually have to fight. That would require rate hikes, not cuts.

The probability-based read right now is that the first scenario (oil spike) is low, the second (persistent food inflation) is moderate, and the third (wage-price spiral) is also low but worth monitoring. The Bank is betting that the current inflation spike is temporary and isolated. If they're wrong, policy gets a lot more restrictive.

Here's the part that doesn't get talked about enough. The Bank of Canada says grocery prices are up 22% since 2022, and they're still trying to figure out why. That's a big number, and the fact that they don't have a clear answer yet is kind of wild. Is it transportation? Climate? Profit margins? All three?

If it's transportation and fuel costs, then falling oil prices should eventually bring grocery inflation down. If it's climate-related supply shocks, that's a longer-term structural problem that doesn't resolve quickly. And if it's profit margins (which some data suggests), then grocery inflation persists until competition forces prices lower, which could take years.

Traders can't do much with that uncertainty except acknowledge it exists. Food inflation is one of those variables that doesn't respond cleanly to market structure or technical analysis. You're dealing with weather, supply chains, and corporate pricing power, none of which show up on a chart.

What you can do is watch how the Bank of Canada frames food inflation in the July report. If they treat it as a temporary supply shock, they're betting it moderates on its own. If they start talking about it as a persistent problem, they're signaling that it could influence policy decisions down the line.