Good morning. Another monthly inflation report shows Canadian prices behaving relatively well, with no sign yet of the inflation time bomb that economists warned us about, either here or in the U.S. Now U.S. President Donald Trump is taking a victory lap, saying the tariff doomsayers are wrong. Did Trump outsmart them all? More on that below. But first:

Tech: The federal Minister of Artificial Intelligence said it is an “urgent issue” for Canada to build large AI companies.

More tech: Canada’s tech industry is gearing up for a big boost in defence spending.

Banking: Equitable Bank chief executive officer Andrew Moor – who built Canada’s largest challenger to the Big Six banks – died unexpectedly over the weekend at the age of 65.

• Today: U.S. Federal Reserve Jerome Powell returns to Congress for a second round of grilling on his decision to hold off on rate cuts.
• Friday: GDP numbers are likely to show that Canada’s economy stalled in April, as trade tensions with the U.S. escalated.
• Alimentation Couche-Tard Inc. is due to report earnings after the close of trading today. Analysts expect tepid consumer spending to weigh on the company’s financials, while being offset in Ontario by the boost from alcohol sales.

Economists were nearly unanimous that Trump’s trade war would reignite inflation. The only open question was by how much. But here we are, nearly six months into the hostilities, and runaway inflation has yet to take hold.

The consumer price index rose by 1.7 per cent year over year in May, according to Statistics Canada numbers released on Tuesday. That’s now 17 consecutive months that Canadian inflation has remained in the Bank of Canada’s control band of 1 per cent to 3 per cent.

There are some caveats here. The removal of the carbon tax in April is helping make the numbers look good. And core inflation, which strips out volatile categories such as food and energy, is still too high for the Bank of Canada’s liking.

But there are no major red flags. Price pressures appear steady, if not easing. Certainly not spinning out of control. Same with the U.S. economy. The Trump administration has been hammering on this point in recent days, claiming that tariffs are not inflationary and ridiculing anyone who thinks otherwise.

“I hope Congress really works this very dumb, hardheaded person, over,” Trump fumed on social media about Powell’s testimony to Congress on the Fed’s refusal to lower interest rates. “We will be paying for his incompetence for many years to come.”

We have seen the economic establishment get it very wrong on inflation before, including in 2021-2022, just before the worst shock to consumer prices in a half-century. Perhaps they missed the mark again. To help cut through the fog on inflation, I spoke to Globe and Mail economics reporter Mark Rendell.

Mark, why haven’t we seen the feared inflationary surge?

There are a couple things going on. Companies in both Canada and the U.S. rushed to get goods across the border in late 2024 and early 2025 to beat the tariffs and counter-tariffs. Many are still working through those stockpiles, so it could take several more months for tariffs to directly show up in consumer prices. Companies may also be eating increased costs in the near-term to maintain market share in the hope that Carney and Trump can reach some sort of deal to remove tariffs.

Canada seems to have quietly put most of its counter-tariffs on U.S. imports on hold. Is that helping keep prices down?

Counter-tariffs were always intended to be targeted measures, aimed at politically sensitive goods for which there were alternatives in Canada. Then over the past two months, Ottawa introduced a number of carveouts, which removed tariffs on inputs from the U.S. that are used in Canadian manufacturing and tariffs on American automobiles.

There has been plenty of debate among economists and politicians about how much these carve outs have weakened Canada’s counter-tariff regime. But there’s little doubt it has dampened some of the inflationary pressures that we would otherwise see.

Do you think there are some demand-side effects keeping inflation contained?

That’s the million-dollar question the Bank of Canada is trying to figure out. There’s no doubt that tariffs put upward pressure on inflation in the near-term. But if they frighten consumers, put a chill on business investment and push up unemployment, then presumably this will weigh on inflation over time.

So far retail sales data in Canada have held up fairly well, and GDP came in stronger than expected in the first quarter. But forward-looking indicators suggest a slowdown is in the pipeline. All eyes are on the April GDP numbers, which will be published on Friday.

U.S. inflation is muted even with an effective tariff rate of around 15 per cent. Is it possible that Trump got it right?

The fact that U.S. inflation has remained in check has certainly strengthened Trump’s hand. But there are reasons to think the inflationary impact of tariffs will become more apparent in the coming months, as companies work through inventories and are forced to manage costs tied to rejigging supply chains. And while Trump appears committed to using tariffs, he has backed down on his most extreme positions – offering carveouts for most imports from Canada that comply with United States-Mexico-Canada Agreement rules, for instance.