From the Desk

Inflation is running hot, but that was expected as the energy crisis hits gasoline prices. But it's not all coming from oil disruption. Tariff effects and the rush to build AI infrastructure are also adding pressure. Tariffs and oil are supply shocks while AI capital spending is a demand shock as it monopolizes inputs. The best case is that these price pressures all peak and then mitigate without contagion into a broader range of goods and services.

If the effects carry on too long, then the danger is that households up their inflation expectations. And then contracts and markets start to price in higher rates, and it all becomes self-fulfilling. Tariffs and oil are easier to look through as one-time price shocks – absent of course, unexpected swings in tariff policy or an unstable Gulf Region. However, AI spending is more challenging as we seem to be entering a multi-year cycle of data center construction. The best case is that the three shocks cool at a reasonable pace. But there is a lot of risk that they won’t, and this could make inflation more embedded and aggressive rate hikes more inevitable.

This creates a tough inaugural test for Kevin Warsh, the new Chair of the U.S. Federal Reserve. He joins his first meeting next week with a committee that is turning more hawkish in line with the data. Warsh has expressed a preference to look through high inflation, and often points to the productivity gains from AI as a reason to be hopeful. However, before we get to the AI payoff we first must deal with rising input costs and possible spillover. For now, expect the Fed to remain on hold.

Sources: Bloomberg, The Financial Times, 2026.

Last week the Government of Canada released its “AI for All” strategy, which lays out a vision to scale up large-scale domestic AI data centers. Key to the strategy is that the federal government will link data center development to “clean energy expansion” and “robust environmental standards.”

Overlooked amidst the recent memorandum of understanding on oil pipelines and carbon pricing is that the federal government and Province of Alberta are collaborating on a policy framework on data centers. Alberta’s pitch is to use cheap natural gas to power a wave of new data centers, which would result in a spike in carbon pollution – running counter to the federal strategy’s emphasis on clean energy. This is likely to be the most contested area between the two governments.

Water usage by large data centers is increasingly under scrutiny. Smaller facilities can be cooled by air, but the increase in server density for AI and other compute-intensive workloads requires larger facilities with more advanced cooling technologies. Many – not all – require large volumes of water. Evaporative cooling is a common technique used by hyperscalers, but it has a large water footprint and often requires freshwater to avoid corrosion. An estimated three-quarters of the proposed data centers in Alberta are in high or extremely high water stress areas.

There are closed-loop technologies that can dramatically reduce water usage, such as direct-to-chip cooling and immersion – but they have their own sustainability tradeoffs. Two-phase immersion cooling often includes polyfluoroalkyl substances (PFAS), also known as “forever chemicals.”

All of these are the tradeoffs the governments will have to navigate. As of now, both sides are aiming to finalize the policy framework by July 1, 2026.

Sources: Global News, Government of Canada, National Observer, 2026. 

Turning to the Canadian insurance sector, the C.D. Howe Institute convened a short-term Task Force on Office of the Superintendent of Financial Institutions (OSFI) Prudential Requirements and Business Lending. The task force issued a report with recommendations that, if adopted, could have a meaningful impact on the investment strategy of small and large insurers alike.

Of note, the task force recommended that, for life insurer investments in private credit funds, a look-through treatment be applied so that capital requirements are based on the risk of the underlying assets rather than the legal wrapper. 

The task force also emphasized that, as the 5% commercial loan limit has been repealed through Bill C-15, OSFI should seize the opportunity to calibrate expectations as to the size, expertise and risk management capacity of the individual institution, ensuring the removal translates into a genuinely more risk-based supervisory approach.  

The task force further stressed that OSFI should make relief mechanisms available to smaller life insurers as well as larger ones. 

We view the task force's recommendations as a sensible step toward aligning capital treatment with underlying economic risk. The next steps rest with OSFI, which needs to translate these recommendations into supervisory guidance and capital framework revisions.

Source: C.D. Howe Institute, 2026.