By Douglas Porter

February 20, 2026

Arguably the biggest economic story of the week landed on our lap as we were going to publishing time, with the U.S. Supreme Court striking down the Trump administration’s IEEPA (emergency) tariffs by a 6-3 vote.

Given that markets had been leaning in that direction, based on the questions by the justices back in early November, the reaction was generally muted. Long-term Treasury yields backed up modestly, as the issue of refunds was left up to the lower courts, while the U.S. dollar nudged slightly lower. Stocks, which have long since shrugged off the trade war, kept on grinding higher in a generally positive week (with the usual dose of rotation).

The administration has made it amply clear in the past few months that it is prepared to rapidly recreate the tariffs through a variety of different tools, but this ruling will somewhat constrain future tariff threats. For Canada, the vast majority of tariffs it faces are sectoral measures and will be unaffected from this ruling—but where it could make a small difference is in the coming USMCA review, potentially removing one point of leverage.

For much of the past year, we had already been asking on the economic front: “Oh tariffs, where is thy sting?” Despite widespread warnings last spring that the unprecedented hike in U.S. tariffs would unleash a wave of inflation, and possibly crush global growth to boot, there had been scant evidence of any serious eruption in prices.

And that’s even with the findings from a now infamous Fed study that estimated that U.S. consumers and businesses were eating about 90% of the tariff costs (a finding that has been corroborated by others). For example, we learned last week that core CPI eased to the slowest pace in almost five years in January at 2.5%, down from 3.3% a year earlier.

Accordingly, markets have been gingerly pricing the odds of a bit more than two Fed rate cuts this year and have taken 10-year Treasury yields down below 4.1%, the lower end of the past year’s range.

This week’s mix of economic data was a little less friendly, both from a growth and inflation perspective. First, there was the long-awaited estimate of Q4 GDP, which came in well short of consensus at a mild 1.4% annualized clip.

Given that the lengthy government shutdown carved about 1 ppt from growth, that leaves the underlying pace remarkably close to average growth for all of 2025 (2.2%). And a rebound to back above that pace in Q1 can thus be expected, given that consumer spending (2.4%) and business investment (3.7%) were just fine in Q4.

But it is fair to say that the average GDP growth rate of above 4% in the middle two quarters of last year overstated the underlying trend, given that some of it reflected a snap-back from Q1.

Perhaps a bit more concerning than the bouncy headline GDP result was a back-up in the related price measures. The December PCE deflator came in hot at +0.4% for both the headline and core, bumping up the latter’s yearly rate a couple ticks to 3.0% y/y. In sharp contrast to the benign CPI, that’s no lower than a year ago, and goods prices have actually sparked up 1.7% y/y compared with a small decline in the previous year.

True, this series is trailing a full month behind the CPI, due to data delays, so is less timely. But the Fed typically tends to put more stock in the PCE deflator; it’s what it officially targets.

There have been numerous questions surrounding the reliability of the CPI recently, and especially after the government shutdown, with an unusually high degree of estimated prices now entering the calculation.

On the latter point, note that core CPI trends were running a full four ticks below core PCE in December. It’s not unheard of to have CPI lower than the PCE deflator, but it’s also not normal—in the past 60 years, the annual trend in core CPI has been 0.5 ppts higher than core PCE.

Again, we’re not saying the CPI is wrong, it’s just unusual to have it tracking so much lower. And the few times this divergence has happened in the past, it’s typically been after inflation had moderated a lot, but soon moved back up (Chart 1).

And the more up-to-date data from early 2026 suggest that the U.S. economy is staying firm, with industrial production solid in January, jobless claims back down to just 206,000 in the latest week, and regional Fed factory surveys solid in February.

Combined with a recent upswing in crude oil prices to around $66/barrel—up 10% from January’s average on tensions with Iran—the firm underpinning for growth suggests inflation could stay around 3% for some time yet.

The latest University of Michigan survey finds consumers agree, with both the 1- and 5-year inflation expectations holding above 3%. And, we doubt that today’s Supreme Court ruling will have a meaningful effect on the near-term inflation outlook, as alternative tariffs are likely to be soon wheeled out.

It’s a somewhat milder inflation story in Canada, reflecting the absence of significant domestic tariffs and a softer underlying economy.

After suggesting that underlying inflation was ‘around 2½%’ for much of last year, the Bank of Canada has more recently been brave enough to claim the 2% target is within reach. This week’s key CPI release mostly supported that view, with headline inflation coming in below expectations at 2.3%, and some core measures moving down to 2.4%.

Meantime, a variety of shorter-term core metrics are behaving very well, averaging around a 2% pace in the past six months and just 1% in the past three. Grocery prices remain a major pain point at 4.8%, especially when compared to U.S. trends of just 2.1% for food at home.

But looking beyond that, markets are still toying with the possibility of another rate cut by the Bank, especially with interest-sensitive housing struggling big-time. We’re not back in the rate cut camp yet, but we are saying there’s a chance.

Those who are in the forecasting business are always well aware that their calls can, at times, go sideways, shall we say—and words can come back to haunt you. Far be it for us to cast stones at those unfortunate few who are remembered mostly for their ill-chosen analysis.

And, there have been a lot of whoppers even in the past year as growth and inflation have mostly defied the doomsayers. In that spirit, here is a small collection of some of the worst calls of the past century, and/or quotes that certain folks would really like to have back.

“Stock prices have reached what looks like a permanently high plateau.” — Irving Fisher, October 1929

“I believe it is peace for our time.” — Neville Chamberlain, British PM, September 1938

“Television won’t last.” — Darryl Zanuck, 20th Century Fox, 1946

“There is no reason for any individual to have a computer in his home.” — Ken Olson, President of Digital Equipment Corp., 1977

“The likelihood of a major collapse in the national housing market seems to me to be quite small.” — Alan Greenspan, Fed Chair, 2005

“We were basically playing against six players.” — Radim Rulik, Czechia coach, February 2026

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.