Tariffs and Oil: A Perfect Storm Brewing for Canadian Inflation

Bank of Canada Governor Tiff Macklem’s warning that inflation risks are on the rise should come as no surprise, given the ongoing trade war between the US and Canada. The latest development – a new round of tariffs imposed by both countries – is one piece of a complex puzzle threatening to upend the country’s economic recovery.

Macklem highlighted the pressing concern that higher energy costs and US tariffs are combining to create a perfect storm for inflation. Oil prices have spiked by over 13% since July, casting a long shadow over the Canadian economy. The war in the Middle East has already had this impact, and it’s likely to continue as long as tensions persist.

The key issue here is that these tariffs are applied narrowly – not imposed on every single product coming from or going to Canada. However, they will still add significant costs for some businesses, potentially trickling down to consumers in the form of higher prices. This is particularly worrisome given Canadian policymakers’ vulnerability to external shocks since December 2025.

The Bank of Canada’s decision to keep interest rates unchanged was widely expected by economists, but it doesn’t alleviate concerns about inflation. The bank itself acknowledged that recent data confirms its prediction for a “broadening recovery” in the economy – but also warned that the war and US tariffs raise the risk of higher inflation.

The trade war between Canada and the US has been escalating since July, with both countries imposing new rounds of tariffs on each other’s goods. The most recent development is Canada’s decision to match the US’s 50% tariff on $28 billion worth of Canadian products – a move that will likely have far-reaching consequences for businesses and consumers.

The role of uncertainty in this situation cannot be overstated. CIBC chief economist Avery Shenfeld noted, “newly heightened uncertainty over trade relations clouds the picture too much to be definitive about what lies ahead.” This is precisely the problem: with no clear end in sight to either the war in the Middle East or the trade war between Canada and the US, businesses are left with a perpetual sense of unease – one that will only exacerbate inflationary pressures.

Canadian policymakers need to be prepared for a range of scenarios – from higher interest rates to even more drastic measures to mitigate the impact of tariffs. They should also work closely with their US counterparts to find a way out of this impasse, not just for Canada’s sake but for the global economy as well.

The perfect storm brewing over Canadian inflation is one that policymakers would do well to take seriously. With the Bank of Canada’s next rate announcement scheduled for October 28, it will be interesting to see how they respond to this rapidly changing landscape. One thing is certain: inaction will only make matters worse – and exacerbate the very real risks to the country’s economic recovery.