Highlights:
Geopolitical risk intensified: We upgraded our headline inflation forecasts for Canada and the U.S. again with higher oil prices persisting. Projections for core inflation, gross domestic product and unemployment rates were largely unchanged from March.
International trade stabilizing: New U.S. announcements on existing Section 232 industrial metals tariffs and potential new pharmaceutical tariffs have not meaningfully changed the tariff landscape. Tariff revenues have continued to drift lower from their 2025 peak.
Central bank forecasts unchanged: Central banks will need to keep a close eye on inflation expectations as high oil prices persist, but won’t rush to respond to the energy supply shock. We maintain our outlook for them to hold interest rates through the end of this year.
Issue in focus:
Today’s energy supply shock echoes the 2022 Russia-Ukraine conflict, but the backdrop is fundamentally different. Global supply chains are more resilient, domestic demand has softened, and the commodity shock is narrowly concentrated in oil. While prices of exposed commodities remain uncertain, we don’t expect elevated oil prices to reignite broad-based inflation in Canada this year.
Forecast changes:
Oil prices have risen above path we assumed in last update
Headline inflation forecasts in Canada and the U.S. were revised higher. Our energy price assumptions continue to follow market pricing shows elevated, yet moderating, oil prices in the quarters ahead. As a result, we continue to expect little passthrough to core inflation this year.
Indeed, earlier research from the U.S. Federal Reserve found “small but significant” second-round effects of oil prices on inflation in Canada, the U.K. and euro area with a 10% permanent oil price increase leading to higher food prices (up 0.3%) and core prices (up 0.1%) gradually over eight quarters.
Moving forward, higher fuel costs will continue to claim a larger share of household disposable incomes, particularly for lower-income households. Still, we expect consumers will tap into savings to blunt the immediate impact before pulling back spending on non-energy goods and services.
We continue to highlight the uneven impact of higher oil prices in Canada and the U.S. The hit to domestic demand if materialized could be offset by rising oil revenues to businesses and governments in oil-producing regions, leaving a neutral impact on GDP and labour markets this year.
New U.S. steel and aluminum tariff adjustments don’t alter trade outlook
Buried beneath Middle East headlines were recent U.S. adjustments to Section 232 tariffs on industrial metals, as well as announcements of new pharmaceutical tariffs to be imposed later this summer.
The U.S. administration introduced a tiered system for steel, aluminum and copper tariffs—leaving a 50% tariff intact on some products, while imposing an easier-to-administer flat 25% on a list of derivative products that were previously tariffed at 50%, but only on their metal content.
New U.S. pharmaceutical tariffs (to be imposed later) critically exempt generic drug imports, which accounted of 79% of U.S. drug imports from Canada over 2022/2023. Overall, pharmaceutical products (including generics) accounted for 1% of Canadian exports to the U.S. in 2025.
Broadly, RBC Economics continues to expect moderation in U.S. tariffs later this year. The U.S. Treasury Department collected US$25.1 billion in customs duties in March after the new Section 122 tariffs kicked in to replace the IEEPA measures struck down by the Supreme Court. That’s 12% lower than duties collected in February, and 27% below the peak level reached last October.
Here’s a summary of all the changes we made in April:
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Headline inflation is now expected to peak in Q2 at 3% in Canada, and 3.7% in the U.S., a significant increase from 2.2% projected for Q1 in Canada (March data still pending), and 2.7% Q1 actual in the U.S. Inflation is expected trend lower before ending the year at 2.4% in Canada, and 3% in the U.S.
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U.S. near-term forecast saw small tweaks. We revised Q1 U.S. GDP growth marginally lower to 1.3% given softer than expected consumer spending growth near the end of the quarter. The unemployment rate forecast in Q2 was lowered slightly to 4.4%, while forecasts beyond Q2 are unchanged.
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Canadian GDP and labour market forecasts were little changed. The latest round of growth and labour market data in Canada aligned well with our prior assumptions of 1.3% GDP growth in Q1, and a 6.5% unemployment rate in Q2.
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We retain our positive outlook for Canada’s labour market. U.S. tariffs continue to weigh on employment in exposed Canadian sectors, while other industries record moderate job growth. The unemployment rate held steady in March, consistent with stabilizing per-worker labour market conditions despite population headwinds that stalled labour force growth.
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Central bank forecasts unchanged. Central banks will need to keep a close eye on inflation expectations as high oil prices persist, but we don’t expect a rush to hike rates in response to an energy supply shock that will already reduce household purchasing power. We have maintained our outlook for the Fed and BoC to hold interest rates through the end of this year.
The BoC held the overnight rate at 2.25% in March. Governor Tiff Macklem reiterated it’s too early to tell the full economic growth impact from the Middle East conflict and elevated oil prices, and the immediate rise in energy prices will be “looked through” by the central bank but not if it broadens and persists. We continue to expect the BoC will wait for additional clarity, and hold rates steady in 2026.
3.5-3.75%
0 bps in Mar/26
The Fed held Fed Funds steady in March with a single dissent. The median dot continued to show one cut in 2026. Core and headline PCE forecasts were revised upward for 2026. In the press conference, Chair Powell didn’t show a clear leaning towards either side of the Fed’s mandate, but said future rate cuts will rest on additional progress in easing inflation. We retain our outlook for no moves from the Fed this year.
The Bank of England’s Monetary Policy Committee voted unanimously to maintain the Bank Rate at 3.75% in March, a more hawkish outcome than expected. The policy summary signalled an inclination to push against the inflationary impact from higher oil prices. As a result, we remove the two cuts previously expected this year, and now see the MPC hold rates steady through 2026.
The European Central Bank held rates unchanged at 2% at in March, but clearly signalled a willingness to act if energy prices rise further from this point and inflation expectations rise. The scenario analysis suggested that if energy prices follow the current futures-implied path, then the ECB could just about keep rates on hold. We retain our forecast that the ECB maintain the deposit rate at 2% in 2026.
The Reserve Bank of Australia hiked by 25bps as expected, but the 5-4 vote split revealed plenty of debate within the board, largely around the timing of rate hikes (now or later) rather than the rate move. We retain our expectation for no more rate hikes this year, but see risks of additional tightening from ongoing domestic tightness, persistently high oil prices, and uncertainty over whether current rates are sufficiently restrictive.
Issue in focus:
Why today’s oil price shock isn’t likely to reignite broad-based inflation in Canada
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.
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.
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.
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.
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.
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.