Iran war ripple effects drive inflation to its highest level since 2023

OTTAWA — Inflation accelerated to its highest level in more than two years in May as price pressures from the war in Iran started to crop up outside the gas pumps.

But most economists weighing in Monday saw little cause for panic in Statistics Canada’s latest consumer price data with oil prices already receding and the Bank of Canada unlikely to move from the sidelines anytime soon.

Statistics Canada said Monday that the annual rate of inflation jumped to 3.2 per cent in May, up from 2.8 per cent in April and notching the highest headline inflation rate since December 2023.

StatCan said gas prices rose 33.2 per cent year-over-year last month as conflict in the Middle East continued to shutter the Strait of Hormuz to oil tankers. The agency said last month marks the most consumers have paid for gasoline since June 2022, when Russia’s invasion of Ukraine drove supply uncertainty.

Prices at the pumps have fallen in recent weeks as peace talks between the United States and Iran progressed.

BMO chief economist Doug Porter said in a note to clients Monday that June is tracking for a 10 per cent decline in gas prices, “which should clip the headline result next month.”

Higher costs for jet fuel – also driven by the war but not captured in StatCan’s April inflation data – showed up in May. Air transportation costs were up 7.4 per cent annually last month after decreasing slightly in April.

CIBC senior economist Andrew Grantham noted in an interview that airfare is recorded in the inflation calculation at the time a flight is taken, not when tickets are purchased.

“People who purchased their summer vacation plans a couple of months ago and had to pay those higher prices with the jet fuel surcharges, those still haven’t entered into the inflation figures,” Grantham said.

He expects air transportation and travel tours will be a sticky segment of the consumer basket over the coming months but should decelerate come the fall.

Inflation, meanwhile, accelerated at the grocery store in May, rising half a percentage point to 4.3 per cent annually. StatCan said grocery inflation has now outpaced the headline rate for 16 straight months.

The agency pointed to rising prices for fresh fruit and vegetables as driving the increase. StatCan said fresh vegetables rose 5.5 per cent – the largest monthly May increase since 2008 – due to reduced supply and higher fuel costs.

Tomato prices rose a whopping 45.2 per cent annually in May, which StatCan attributed to tough growing conditions in Mexico. U.S. tariffs also meant Mexican growers planted less acreage, StatCan said, contributing to supply constraints.

Grantham said the closure of the Strait of Hormuz also inflated fertilizer prices, which could’ve been passing through into food prices in May.

That, alongside fuel price hikes, might be moderating some of the easing in grocery inflation seen at the start of 2026, he said.

Porter said May’s headline inflation result “stings somewhat” as stubborn food inflation proves “a significant thorn.” But if recent declines in oil prices are sustained, he said that should deliver some relief for consumers in the months ahead.

Prices for computer equipment, software and supplies rose 3.9 per cent in May. Demand from artificial intelligence data centres has put a supply crunch on key computer inputs, StatCan said.

Offsetting the price hikes in May were ongoing declines in shelter inflation, which edged lower to 1.7 per cent year-over-year last month. Prices were also growing at a slower pace for passenger vehicles, tools and other household equipment.

The May inflation report will be the Bank of Canada’s last look at price data before its next interest rate decision on July 15.

Financial markets place odds of a rate hold at the central bank’s next meeting at 93 per cent as of early Monday afternoon, according to LSEG Data & Analytics.

Bradley Saunders, North America economist at Capital Economics, said in a note that he expects the rising fuel and food prices that were driving inflation higher last month will be temporary.

There was little change in the Bank of Canada’s preferred measures of core inflation in May, which economists are watching closely to see if the energy shock spreads much beyond the gas pumps.

“With the worst of the oil price surge now seemingly behind us, the (Bank of Canada) will be hoping that sizeable second-round effects have been averted,” Saunders said.

Grantham said core inflation figures might accelerate modestly heading into the summer, mostly due to the air transportation and travel tour segments.

Outside of that, he sees little reason for concern from the Bank of Canada, which was tracking a cooling trend in underlying inflation heading into the Middle East conflict at the start of the year.

“That gives the Bank of Canada plenty of leeway, in terms of seeing a slight acceleration in core measures but not having to react,” he said.

“We see no change from the Bank of Canada either at the next meeting or throughout the remainder of 2026.”

This report by The Canadian Press was first published June 22, 2026.

Craig Lord, The Canadian Press