Insights

The recent surge in oil prices from the Middle East conflict is reminiscent of the period after the Russia-Ukraine war intensified in 2022, although with different inflation implications.

On both occasions, global commodity prices rose sharply as critical energy and fertilizer supplies were choked, leading to widespread concerns about the potential stagflationary impact on the Canadian and U.S. economies as higher oil prices cut into household purchasing power.

The conflict this year has already prompted a bigger oil price response, but the economic backdrop fundamentally differs. Global supply chains are in much better conditions with limited disruptions seen to-date, while domestic demand and core inflation pressures in Canada have slowed.

Higher oil prices persisting beyond this quarter could raise non-energy prices, and seep into core inflation. But, we don’t expect a repeat of 2022’s sustained, widespread inflation this year.

A more oil-centric commodity price shock

Concerns over global oil supply are more heightened this year compared to 2022. At that time, sanctioned Russian oil was redirected to Asia, posing no immediate threat to global supply. Global oil production actually rose by 3.7 million barrels per day in 2022 despite the war that stretched on.

Current Middle East conflict has essentially halted transit through the Strait of Hormuz that’s a critical energy corridor. U.S. EIA estimates put crude oil shut-ins from Middle Eastern producers at about 7.5 million barrels per day in March, potentially rising to 9.1 million barrels per day in April.

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Urea fertilizer prices have also surged, but this will weigh more heavily on agricultural producer margins than consumer food prices.

Grain farmers are price takers in global markets, and global grain crop prices—the metric that matters for consumer food prices over time—have remained far more stable than in 2022, when prices spiked due to supply concerns near Russia, Ukraine, and Belarus.

Beyond oil and urea fertilizers, worries about sulphur, methanol, and aluminium have also grown. However, most industrial metal and agriculture commodity prices have held steady through early April.

Global supply chains see localized disruptions

Importantly, the Russian-Ukraine war compounded systemic inflationary pressure that was already building across global supply chains following pandemic lockdowns. By the end of 2021, global container costs had quintupled. Airfreight saw less impact, but shipping rates still doubled. 

In comparison, global supply chains entered this year’s Middle East conflict in much better condition than during previous disruptions, despite ongoing challenges in the Red Sea. The conflict’s impact has remained largely confined to nearby regions and specific transportation modes.

Tanker costs rose sharply following the Strait of Hormuz closure, and air and sea shipping capacity near the Persian Gulf has been severely disrupted. However, since the Persian Gulf functions as a cul-de-sac for shipping, most major global routes have avoided direct impact.

Rising fuel costs have pushed cargo and freight costs higher through early April, but the increases are modest compared to the 2021–2022 surge. Overall, we see little evidence of a return to the broad-based supply chain disruption that drove global inflation in 2021–2022.

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Domestic demand and labour markets have softened

Canada’s economy is softer than in 2021–2022. Unemployment was very high in 2021, but that failed to reflect elevated household savings boosted by large amounts of direct government transfers as well as spending constraints during earlier pandemic lockdowns.

Once restrictions eased, those savings combined with pent-up demand meant consumers were more tolerant of high prices for a period. Strong domestic demand also triggered widespread labour shortages, accelerating wage growth to feed into higher services inflation.

Heading into the current conflict, Canada’s unemployment rate has stabilized but remains elevated after rising for much of the past few years. The increase this time around also accurately captured a softening in domestic demand that led to significant easing in core inflation pressures into early 2026.

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GDP per capita declined sharply in 2023 and has since recovered. By the end of 2025, however, it remained below early 2022 peaks when the BoC began raising interest rates.

To be sure, the household savings rate remains higher than before the pandemic, providing a buffer against near-term elevated energy costs. Still, with a weaker economy as a starting point, we expect consumers on balance will be much less tolerant of rising prices this year than in 2022.

Inflation expectations could come unhinged more easily

Having just emerged from a large and persistent inflation shock in earlier years, Canadian consumers’ and businesses’ inflation expectations are less anchored than they were at the onset of the pandemic. Back then, inflation had been low and steady for decades— since central bank inflation targeting began in 1991.

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The BoC did eventually respond forcefully to the inflation surge in 2022 by raising interest rates, reaffirming its commitment to the 2% inflation target. Since then, inflation expectations have normalized. Although, they were still above pre-pandemic levels through 2024 and 2025.

As the BoC governor Tiff Macklem warned in the past, unmoored expectations could risk persisting  high inflation even after the input prices normalize, allowing elevated inflation to become entrenched. They should, therefore, be monitored closely as the impact of high oil prices continue to play out.

Overall, what has been a sharp but concentrated commodity price shock so far should reinforce that a repeat of broad-based inflation similar to 2022 is unlikely this year.

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About the author:

Claire Fan is a senior economist at RBC. She focuses on macroeconomic analysis and is responsible for projecting key indicators including GDP, employment and inflation for Canada and the US.

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