Markets are celebrating that the United States and Iran agreed to a two-week ceasefire amid ongoing negotiations.  So far, the parties seem worlds apart, especially on issues like Iran continuing its nuclear program. But we all hope for a sane and rapid end to the carnage. Fossil fuel prices are down sharply, and stocks are giddy. More importantly, government bond prices are rising.

Falling fossil fuel prices reduce inflation fears. So do falling home prices and rents. Shelter accounts for 30% of Canada’s CPI basket and 36% of the US CPI — by far the largest single inflation driver in both countries.

Last month, home sales in the Greater Toronto Area (GTA) rose 1.4% over February but were still 52% below the 10-year average for March. See, Toronto home sales post first monthly increase since September.

Every type of property has lost value in Toronto and its surrounding suburbs, but prices remain debilitating for most. Last month, the GTA home price index was $928,000 — 7% lower than in March of 2025 and still an impossible 9 to 10x the median household income (around 100k before tax).

The real estate industry loves to cite economic uncertainty as a deterrent to prospective buyers, with little mention of unaffordable pricing. Significantly more mean reversion is needed before purchasing power returns to buyers.

Struggling consumers are a major reason the bond market’s best guess of inflation over the next five years has remained flat, even since the war began. Higher prices reduce spending power, and in the long term, that’s less inflationary. This morning, Futures markets are back to pricing in an easing Fed by year-end. For some historical context, see Pain at the Pump Should Mean Pain in the Economy, Not Higher Rates:

In the annals of central-bank mistakes, three loom large: 1973, 2008 and 2011.

In the oil shock of 1973-74 caused by the Arab oil embargo, the Federal Reserve is generally regarded as having ignored the second-round effects of oil prices and kept monetary policy too easy.

But the mistake was made not when oil prices rose, but when they fell back during the deep recession caused by the oil-price spike. As recession took hold, the Fed eased policy, then kept it easy even when core inflation refused to drop below 6%.

It’s hard for those who weren’t there to believe now, but in 2008 and 2011 the ECB raised rates, focusing on soaring crude prices and ignoring already obvious trouble in the financial sector. In 2008, it had to reverse course rapidly as banks imploded, and again in 2011 as the entire euro system threatened to implode.

In each case, the problem of high oil prices quickly turned into a problem of a weak economy, with lower oil prices and falling inflation. As the saying goes in commodities markets, the cure for high prices is high prices. These hurt demand and, eventually, stimulate investment in new supply.

Second, high oil prices also hit the economy. Consumers and businesses face higher and hard-to-avoid costs, much like a new tax. There should be no need for a double whammy for borrowers in the form of higher interest rates.

It’s hard for inflation to find purchase amid a deteriorating labour market. Canada’s economy has lost 100k jobs in the past two months, and Moody’s Chief Economist Mark Zandi points out that the indicator that has called every recession since WWII just signalled the US is already in one.

Danielle Di-Martino Booth connected many of these dots well this morning on Bloomberg.