Rising oil prices will not strongly revive inflation in Canada, according to banking estimates

Recent economic estimates indicate that the sharp rise in oil prices, linked to tensions in the Middle East, is unlikely to lead to a broad inflation wave in Canada, nor will it prompt the Bank of Canada to change its interest rate path in the near term.
Although the current supply shock is significant in size, with oil production estimated to have decreased by about 7.5 million barrels per day in March and potentially exceeding 9 million in April, its impact remains limited in scope compared to what happened in 2022.

A concentrated shock not affecting all goods

The key difference this time is that the increase is mainly concentrated in oil and some production inputs like fertilizers, while prices of most other goods — including food and metals — have remained relatively stable.
This divergence reduces the likelihood of price pressures spreading to the rest of the economy, unlike what happened during the war in Ukraine, when energy, food, and metal prices rose simultaneously, leading to broad inflation.
Global supply chains, which previously suffered significant bottlenecks, now appear more stable, limiting the transmission of shocks to final consumer prices.

Weaker economy limits inflation transmission

Another decisive factor, according to the analysis, is weaker demand compared to 2022. The Canadian economy enters this phase with less momentum, with GDP per capita still below pre-2022 levels and a relative decline in domestic demand strength.
This weakness means consumers are less able to absorb new price increases, reducing the likelihood that rising energy costs will translate into broad inflation across sectors.
Although the savings rate remains higher than pre-pandemic levels, it is not expected to be sufficient to fully offset the impact of rising costs.

Bank of Canada monitors “contagion”

The Bank of Canada is currently focusing on whether the oil shock will remain confined to the energy sector or begin to affect core inflation and price expectations among consumers and businesses.
The central bank had tightened its monetary policy significantly in 2022 to bring inflation back to its 2% target, and any new rise in inflation expectations could complicate the task of maintaining this stability.

Likely scenario: limited impact

In the baseline estimate, the impact of rising oil prices is expected to remain limited in time and sector, without turning into a broad inflation wave as before.
However, the risk remains if prices continue to rise for a longer period, as high costs may gradually seep into other goods and services, potentially bringing inflationary pressures back to the forefront.

A delicate balance in the coming phase

These data reflect a delicate phase the Canadian economy is going through, where a strong external shock intersects with weak domestic demand, creating a fragile balance between inflation risks and economic slowdown possibilities.
In this context, monetary policy appears likely to remain cautious, with close monitoring of any signs of pressure transmission from the energy sector to the broader economy.