Skip to main content

War in Ukraine could push up inflation at a time when Canada’s consumer prices are already rising at the fastest pace in 30 years.

Oil prices briefly broke through US$100 a barrel on Thursday morning after news that Russian troops had crossed over into Ukraine from multiple sides. At the same time, Western powers vowed harsh new sanctions against the Kremlin.

Russia produces about 10 per cent of the world’s oil, meaning disruptions to its exports, either directly as a result of the conflict or because of the sanctions, could cause prices to rise even more.

Every $10 increase in oil prices tends to nudge up inflation by around 0.4 percentage points, Bank of Montreal economists noted in a recent report on the possible economic fallout of the invasion.

In January, Canada’s inflation rate stood at 5.1 per cent, which was already the largest year-over-year increase in the consumer price index since 1991.

Canadians could now see a sharp rise in gas prices. And the shock from higher oil prices could feed through global supply chains and drive up both production and transportation costs for companies, analysts say.

Businesses would likely offload those higher costs onto consumers, said Benjamin Reitzes, an economist at BMO.

Because inflation is already so high, “it makes it much more difficult for producers to swallow that price hit,” Mr. Reitzes said.

It doesn’t help that the Canadian dollar has so far failed to rally along with oil prices, which are quoted in U.S. dollars. This means Canadians are feeling the effects of both higher energy costs and a weaker-than-usual exchange rate, Mr. Reitzes noted.

The conflict could have a significant impact on global availability of grains and metals. Canada could feel the ripple effects of price increases tied to disruptions in supplies of those materials, said Shawn DuBravac, chief economist at IPC, a global electronics industries trade association.

Russia produces around 11 per cent of the world’s nickel – which is used in stainless steel, alloys and batteries, among other things – and more than 5 per cent of its aluminum, a key input in construction, electronics and food and beverage packaging.

In 2018, U.S. sanctions on Russia-based Rusal, one of the world’s largest aluminum producers, pushed global aluminum prices to a seven-year high, analytics firm S&P Global noted in a recent report.

Both nickel and aluminum prices shot up on Thursday on the London Metal Exchange, though both metals gave up some of those gains later in the day.

Although Canada is a major producer of grains and raw materials, higher global commodity prices would hit domestic manufacturers, and those cost increases could eventually reach Canadian households, Mr. DuBravac said.

“Consumers will see price increases in places they might not have expected,” he added. For instance, the price of beer might rise because of a hike in the cost of aluminum cans.

When the United States, under then-president Donald Trump, slapped new tariffs on aluminum, American and Canadian brewers warned of steep cost increases. Today, with the price of aluminum already at a 30-year high, the industry is eyeing the developments in Ukraine warily.

“The market will be watching closely to see whether the threat of ‘severe sanctions’ disrupts the supply chain or causes price spikes,” Jim McGreevy, CEO and president of the Beer Institute, a U.S. trade group, said by e-mail.

The world’s supply of potash, which is used in fertilizer, could also be affected by the conflict. This could affect the food industry, noted Dennis Darby, president and CEO of the Canadian Manufacturers and Exporters association.

Russia is the world’s second-largest producer of potash after Canada, accounting for 20 per cent of global supply.

But Mr. Darby cautioned that it’s too soon to tell whether and how the situation in Ukraine will affect Canadian manufacturers.

Russia’s attack on Ukraine has also stoked fears of semiconductor shortages, which have already hobbled electronics producers and automakers for roughly a year.

Russia and Ukraine are key suppliers of neon, according to advisory services firm Techcet. Russia is also a source of palladium and C4F6, the company recently noted. All of these materials are used in semiconductor manufacturing.

Several major chip makers have downplayed the potential impact of the Ukraine crisis, Mr. DuBravac noted. However, with global supply chains already under pressure, even a minor additional kink can have outsized effects, he said.

Patrick De Haan, head of petroleum analysis at gasoline price tracker GasBuddy, previously told The Globe and Mail that the worst-case scenario at the pumps would see Canadians paying around $2 a litre on average in Vancouver, $1.85 in Montreal, $1.75 in Toronto and $1.65 in Calgary.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe