Soaring Diesel Prices Threaten New Inflationary Shock as TD Downgrades Housing Outlook
Economists warn that surging diesel prices, fueled by the Iran war and reduced Russian refining capacity, could raise Canadian CPI inflation by 0.6 percentage points and U.S. inflation by 0.8 points. Meanwhile, rising bond yields have prompted TD Bank to forecast a 5% decline in home sales this year.
The ongoing Iran war has driven up oil prices, but diesel prices have soared far beyond what a typical move in crude would normally imply. Challenges in transporting products through the Middle East, combined with the shutdown of some Russian refining capacity due to the Ukraine conflict, have caused a global diesel supply crunch.
Scotiabank economists calculate that a temporary 15 per cent increase in the diesel spread would raise consumer price index inflation in Canada by 0.6 percentage points and by 0.8 points in the United States. Higher diesel costs spread through freight, production, and distribution networks, leading to transportation price increases first, followed by food, shelter, and other categories one to 18 months later. Oxford Economics found evidence that U.S. trucking companies are already passing part of the fuel shock onto customers.
This broader inflation pressure extends well beyond energy sectors, creating a gradual and persistent pass-through of costs to consumer prices via supply chains. If inflation expectations become sensitive, central banks such as the Bank of Canada and the Federal Reserve could face potential forced interest rate hikes.
Concurrently, higher bond yields are impacting the housing market. Toronto Dominion Bank revised its forecast after sales declined for the first time in six months in August. TD Bank now expects home sales to decline five per cent this year and prices to stay flat, reflecting the strain of higher mortgage rates on buyers.
In equity markets, leadership is narrowing and participation is deteriorating despite record highs.