Food prices may rise soon as diesel ‘shock’ bleeds through economy: report

Canadians could wind up with a bigger grocery bill in the coming months as a major price “shock” for diesel and crude oil works its way through supply chains, according to Scotiabank.

Crude oil supplies have been particularly strained from the Iran war choking off most shipments through the Strait of Hormuz, while diesel has been in short supply worldwide as Russia, which is a major producer, has seen its diesel refineries and infrastructure damaged by its war with Ukraine.

Diesel is crucial for economies worldwide because it’s used to fuel all sorts of vehicles and machinery, including in logistics, agriculture and industry.

Scotiabank’s report, released Monday, explains how these spiking diesel and oil prices are expected to be inflationary, and lead to just about everything getting more expensive — including food and shelter.

“The Iran war has led to more than a typical oil shock. Diesel prices have risen well beyond what the move in crude would normally imply, adding a distinct and broader layer of inflation pressure to the latest energy shock,” said Olivier Gervais, Scotiabank director of modelling and forecasting, who authored the report.

“Diesel’s reach extends well beyond the pump. As a critical input into trucking, agriculture, construction and manufacturing, higher diesel costs spread through freight, production and distribution networks before ultimately reaching consumer prices.”

If diesel prices rise, then businesses will see their costs increase, and unless they absorb those increases or offset them elsewhere in their operations, those higher costs often get passed on to consumers.

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The report explains how those consumer price increases happen gradually, and over time, as these price shocks send a ripple effect through supply chains, and wind up raising sticker prices on store shelves.

First, transportation gets more expensive because diesel is a cost directly tied to getting some industrial equipment, tractors and other machines to work, and what gets trucks, cargo ships and trains moving.

Once those costs are realized by companies, there is what the report calls a “lag” effect, where those higher costs get passed along to other areas over the course of 12-18 months.

“Shelter and food prices rise, but with an important lag—peaking roughly one year after the shock for shelter and 18 months for food,” says Gervais.

“That delayed response is consistent with higher transportation, heating, and production costs gradually working their way through the supply chain.”

The Iran war began on Feb. 28 of this year, while the Russia-Ukraine war has been ongoing since 2022. This means according to Scotiabank’s estimates, consumers may start feeling significantly more financial pressure starting around March 2026.

Those risks are being monitored closely by central banks, including the Bank of Canada, which has a mandate to keep prices stable in the economy while supporting economic growth by adjusting interest rates as needed.

This means, if inflation spikes as a result of these higher prices, then taking out a loan or renewing one, like a mortgage, could also get more expensive.

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In August, Governor Tiff Macklem at the Bank of Canada said there was “little evidence that higher oil prices have fed through to other goods and services prices more broadly,” and added:

“But it is early days and we will be watching this closely.”

The Bank’s inflation target is between one and three per cent, and higher oil and gas prices in particular have kept consumer inflation at three per cent in July and August.

Higher interest rates can help bring down inflation, and when it comes to elevated diesel and oil prices, the Scotiabank report says, “a longer-lasting shock would increase the risk of broader inflation pressure and a stronger monetary policy response.”

“For central banks, persistence is problematic. The Bank of Canada and the [U.S.] Federal Reserve can look through a temporary relative-price shock, but not one that spreads into broader inflation expectations,” said Gervais.

“With the diesel shock adding to an already widening set of upside risks, a sustained move would increase the pressure to raise rates more aggressively.”