Dijardins: Iran war could push inflation in Canada above 3% again

Ottawa —
Economists at Desjardins warned that the rise in energy prices related to the war in Iran could push inflation in Canada to exceed 3% during the current quarter, adding new pressures on the Bank of Canada and mortgage borrowers.

The report expects annual inflation to reach about 3.1% in the second quarter of 2026, a level slightly higher than the recent Bank of Canada forecasts, which anticipated inflation peaking near 3% before gradually returning to the 2% target.

The core pressures are concentrated in oil and gasoline prices, as Desjardins expects fuel prices to remain about 30 cents per liter higher in 2026 and 2027 compared to previous forecasts before the escalation of the conflict.

Although the temporary suspension of the federal fuel tax may alleviate part of the burden on consumers, the report sees its impact as limited in the face of the broader rise in crude prices.

Economists also warned that rising energy and transportation costs may gradually pass through to food prices and other consumer goods, but this effect may appear with a delay in the coming months.

This comes at a time when the Bank of Canada faces a difficult equation: inflation may rise again due to energy, while indicators of economic weakness appear, including unemployment rising to 6.9% and a decline in consumer spending momentum.

This uncertainty may be reflected in the mortgage market, as rising inflation expectations and geopolitical risks lead to higher bond yields, putting pressure on fixed interest rates among lenders.

As for the variable interest rate, it remains linked to the path of the Bank of Canada, which may find it difficult to cut rates if high energy prices continue to fuel inflation.

Desjardins sees that the inflation path for the rest of the year will largely depend on the duration of the war in Iran, the continued rise in energy prices, along with the risks of revising the trade agreement between Canada, the United States, and Mexico.