Why the Iran war could spike grocery prices

President Trump seems to prefer launching major geopolitical moves when markets are closed — for a simple reason: markets react. 

The United States abducted Venezuelan President Nicolás Maduro on Jan. 3—a Saturday. The joint U.S.–Israeli strikes on Iran began Feb. 28—also a Saturday. It gave markets time to digest the shock. But markets eventually reopen. And by Monday, the economic implications were already becoming clearer.

If tensions persist, Canadian food prices could feel the impact.

The focal point is the Strait of Hormuz, the narrow waterway between Iran, the United Arab Emirates and Oman. It is one of the most important arteries of the global economy. Roughly 20% of global oil supply, 23% of natural gas and about 30% of global chemical fertilizers move through that corridor each year.

 This is not a regional chokepoint. It's a global one.

Unlike Russia’s illegal invasion of Ukraine four years ago—when markets worried about access to wheat and grains—this crisis is fundamentally about energy and industrial inputs.

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Shipping through the strait has already slowed. Cargo operators are wary and insurers are raising war-risk premiums. When insurance disappears, ships often do, too.

Fertilizer markets are particularly vulnerable. The Middle East is a major exporter of urea and ammonia, both critical for global crop production. Any sustained disruption will push input costs higher.

Canadian farmers try to shield themselves from volatility by pre-buying inputs months ahead. But they aren't fully protected. Some fertilizer is locked in early, but other purchases remain exposed to global price swings. Diesel, meanwhile, is the real wild card.

Energy markets have already reacted. Oil is up about 13% since Monday. Natural gas prices in some regions have jumped 30%. Diesel prices are climbing between 8% and 13%. Agricultural commodities—wheat, soybeans, milk—are edging upward, but markets are not panicking. 

For Canada, the concern is transportation costs across the food supply chain.

If diesel were to spike 25% under a prolonged Iran conflict scenario—combined with Canada’s scheduled industrial carbon price increase on Apr. 1—the effect on food inflation could be noticeable. The country’s industrial carbon price will rise from $95 to $110 per tonne. Yes, it is still there. Someone in Ottawa once referred to it as “shadow taxing.”

Our models suggest this combination could add 0.4 to 0.7 percentage points to national food inflation by May or June. That may not sound dramatic, but every percentage point of food inflation translates into roughly $150 to $200 more in annual food spending for the average Canadian household. Fresh produce and meat would likely feel the pressure most.

 READ: Food inflation spiked 7.3% in January. Here's what's driving the increase

And Canadians are already under strain. According to the latest data from Statistics Canada, food prices are currently rising at 7.3% year-over-year, far above the country’s overall inflation rate of about 2.3%. 

In other words, the system is already running hot.

But carbon pricing is only one part of the equation. Fuel used across the food system—from farm equipment to trucks, rail and processing facilities—is also subject to other levies, including federal excise taxes, provincial fuel taxes and sales taxes such as GST or HST applied to fuel purchases. Despite exemptions, these levies still increase transactional costs for everyone involved in food distribution in Canada.

Individually, these costs may appear manageable, but they compound. When global energy prices rise at the same time as domestic fuel-related taxes remain embedded throughout the supply chain, the pressure on food production, processing and transportation costs increases as well.

Still, energy shocks alone rarely drive long-term food inflation. Exchange rates, labour costs and global commodity markets typically matter far more. What matters most now is duration.

If the conflict fades quickly, the market impact will likely remain limited. If it drags on, costs will ripple through global supply chains.

Global energy shock. Domestic carbon tax hike.

Lovely timing.