Canadian and U.S. Inflation Jumps While Stocks Stay Near Record Highs

Inflation in both Canada and the U.S. is accelerating again as rising energy prices push costs higher for consumers and businesses alike. Despite growing concerns over inflation, interest rates, and the ongoing war in Iran, investors continue to power stock markets toward record highs.

Why Inflation Is Rising in Canada and the U.S.

Canadian and U.S. inflation continues to rise as the war in Iran drives energy prices sharply higher. Investors appear largely unfazed, however, as both the Toronto Stock Exchange (TSX) and S&P 500 remain near record highs.

Canada’s inflation rate advanced to 2.8% in April, from 2.4% in March. This represents the highest inflation rate in two years but was below analysts’ forecast of 3.1%.

The surge in Canadian inflation is being driven primarily by the war in Iran, with the cost of gasoline jumping 28.6% on an annual basis. The disruption in global oil shipments also comes at a time when Canadian gas stations are switching to more expensive summer gasoline blends.

The daily national average for a litre of gasoline in Canada is $1.87. A month ago, it was $1.74 per litre; a year ago, it was $1.37.

On the plus side, food inflation slipped from 4.0% in March to 3.5% in April

The April inflationary reading is the last set of data from the Bank of Canada before it makes its next interest rate decision on June 10. The central bank has held its key lending rate at 2.25% over its last four policy decisions, dating back to October 2025.

South of the border, U.S. inflation is also on a tear, jumping to a three-year high of 3.8%. Almost half of that increase was a result of higher energy prices. Housing and food prices also contributed to the increase in U.S. inflation.

In the U.S., the national average for a gallon of unleaded gasoline is $4.53; the highest level since July 2022. In the State of California, though, a gallon of gas is $6.15. While significantly above the U.S. national average, this works out to approximately $1.62 per litre in Canadian dollars.

It appears as though U.S. inflation will remain stubbornly high, with economists warning it could hit 4.0% in May or June and stay near 3.5% for the remainder of the year.

How Does Inflation Impact Stocks?

Inflation has a direct impact on the stock market; the higher it is, the more negative the impact on stocks is. Higher inflation makes goods and services more expensive, cutting into purchasing power.

For example, higher gas prices mean that the average Canadian has to make ends meet by cutting back on spending in other areas. For corporations, higher inflation cuts into corporate spending and profit margins.

To combat climbing inflation, central banks, including the Bank of Canada and U.S. Federal Reserve, are forced to raise interest rates, which increases the cost of borrowing. And this, too, negatively impacts earnings.

Of course, this is a typical scenario, but the stock market is not behaving as you’d normally think it would. The TSX, Nasdaq, and S&P 500 are all near record levels.

Despite higher inflation, a war in Iran, and soaring oil prices, investors are sending stocks significantly higher. Since the start of the war, on February 28, the S&P 500 is up seven percent, while the Nasdaq has surged 14%.

Investors are shrugging off geopolitical uncertainty thanks to strong first-quarter earnings. That momentum is expected to continue for the rest of the year, with S&P 500 companies forecast to see profits increase 24% over 2025. That’s double the earnings growth forecast just six months ago.

However, as history has shown, momentum and investor sentiment can change very quickly.

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