Canadians said goodbye to lower gas prices and hello to higher inflation last month, as the Iran War shocks global oil markets. Gas prices made the sharpest surge on record in March, according to BMO Capital Markets. The bank warns this will drive the Consumer Price Index (CPI) much higher, even before considering the spillover effect of higher energy prices into other goods and services.
Canada Just Saw Its Largest Gas Price Surge On Record
Canadian CPI and CPI gasoline, % change. Estimated gasoline price change marked with horizontal red line at ~21% mark.
Source: BMO Capital Markets; Statistics Canada.
Canada may have a ton of oil, but there’s no friends and family discount for global commodities. While the Iran War only impacts Gulf oil exports directly, markets are efficient. This means that global buyers who face a shortage compete for any Canadian supply that can be exported. The result is Canadians are suddenly facing much higher gas prices.
“ …Canadian gasoline prices are poised to jump by about 21% in March. That will rank as the largest monthly percent rise on record for gasoline prices (dating back to 1950; the index presumably measured whale oil before that),” explains BMO Chief Economist Douglas Porter.
A 21% increase over just one month would be the largest on record for Canadians. The bank notes the previous record was a 19% increase seen in June 1983, which was nearly met in the combined February/March period in 2022, when Russia invaded Ukraine.
Soaring gas prices won’t just hit Canadians at the pump, they will also have a big impact on inflation.
Canadian CPI To Spike After Gas Price Shock
Canadian headline CPI has shown unusually weak growth in recent months due to falling energy prices, primarily oil and gas. Energy prices suppressed February CPI by 0.8 percentage points, primarily due to a base effect from the removal of the consumer carbon tax. The fallout from the Iran War is set to more than offset the base effect.
“With a weight of 3.2% in the CPI, this factor alone will kick up March consumer prices by almost 0.7 ppts,” explains Porter.
He adds, “And that’s before any spillovers into fuel oil, diesel, fertilizer and, ultimately, food prices. With oil prices ending March on a high, don’t look for fast relief in April, even if there is a favourable turn in the conflict.”
The contribution to CPI is an addition to the end of the base effect from the carbon tax, which was set to appear in April. The Bank of Canada estimates the end of the base effect is set to add 0.7 points to CPI, which suggests the combined impact can add 1.4 points to headline CPI by the end of April.
The Bank of Canada is unlikely to directly view the sudden surge in CPI as a reason to hike rates. Central banks are looking to address inflation caused by excess demand, typically the result of too much money flowing through an economy.
In the current scenario, CPI is rising due to an external shock that will reduce disposable income. As a result, headline inflation will climb as consumers are forced to divert capital from other areas of consumption. If not resolved promptly, this means rising prices while there’s a drag on the economy.
The current situation doesn’t mean that cheaper mortgage financing is just around the corner. Fixed-rate mortgage rates are based on benchmark bond yields, with investors expecting a return on capital that beats inflation. With a five-year government bond yield now 55 basis points higher than last year, it would be genuinely surprising to see lower borrowing costs without a much larger drag on the economy.
Hard to convince me that the consumer carbon tax was to prevent revenues from falling for the gov when prices fell. They didn’t hit exports with a carbon tax. The environmental impact is only domestic, apparently.
Back that truck up. What do you mean by “supply that can be exported.” Is that limited or something? I might be reading too much into it, but it feels like a big point said in passing that I’m trying to understand.
Thank you in advance.
It’s a basic concept in finance that applies to any asset or commodity for trade. All goods have a price, minus the cost of liquidity.
Example: Canadian oil (WCS) is heavy oil, similar to the stuff in Russia and Venezuela. Not everywhere can process it, so it trades for $10-$20 lower than Texas crude. That’s why China, the US, etc. are important trade partners, since they have the facilities.
Cost is another $10-15/barrel to upgrade.
He normally explains stuff like this, but I guess his inner trader got the best of him.
Gas isn’t that big of a deal. Sure, it’s more expensive but it’s a few pennies overall. Not big enough to impact the housing market, which is an industry 8 times bigger than oil and gas.