So much for the end of high inflation

The article argues that the Iran war is driving a second inflationary shock, with Canadian inflation at 2.4% in March after tax effects and U.S. headline inflation potentially reaching 4% by summer. Gasoline prices have posted the largest monthly increase on record in Canada, while fertilizer costs are up 40% since the war began, raising the risk of broader food inflation. The message is that energy efficiency may blunt but not prevent the price shock, making inflation and growth outlooks materially worse.

Analysis

The market is underpricing the duration mismatch between a geopolitical supply shock and central banks’ ability to respond. Even if headline inflation peaks only modestly higher, the second-round effects matter more for markets: freight, fertilizers, food processing, and discretionary consumer spending all absorb costs with a lag, which means margin pressure shows up after the first inflation print fades. That makes the inflation impulse more persistent than the initial oil move would suggest, especially if households treat gas and groceries as permanent rather than transitory price resets.

For Canadian banks, the near-term hit is not credit quality but mix: higher inflation keeps nominal rates elevated, but it also squeezes mortgage affordability, reduces loan growth, and delays the policy-easing path that would otherwise support deposit and wealth flows. BMO is the more macro-sensitive of the two given its U.S. exposure and heavier sensitivity to consumer-credit normalization; CM is the relatively cleaner defensively positioned bank if the shock morphs into stagflation. The bigger risk to both is not defaults next quarter, but a slower 6-12 month deterioration in consumer balance sheets and a softer fee pool if equity markets stop looking through the shock.

The consensus is too anchored to energy efficiency as a buffer. Efficiency gains lower the elasticity of output to energy prices, but they do not eliminate the pass-through when the shock hits agriculture, aviation, trucking, and imported food chains simultaneously. That is why the inflation risk is broader than gasoline: it can reprice expectations before it meaningfully crimps GDP, forcing central banks to stay restrictive longer and making duration and cyclicals vulnerable even if growth doesn’t collapse immediately. The contrarian setup is that the initial equity complacency can persist for a few weeks, but if oil remains elevated into the summer planting and travel seasons, the second-wave inflation trade becomes a 2-3 month problem, not a one-off headline event.

Key Decisions for Investors

• Short BMO vs long CM on a 1-3 month horizon: BMO carries more macro beta to U.S. consumer credit and growth-sensitive fee income; CM should hold up better if inflation keeps rates elevated but growth slows.
• Buy 3-6 month put spreads on XLY or long-term consumer discretionary peers: higher fuel and food bills hit lower- and middle-income spending with a lag, and the second-round squeeze usually shows up after the first inflation peak.
• Short duration via TLT or IEF call structures over the next 6-12 weeks: if inflation expectations re-accelerate, yields can back up even without stronger growth, especially if central banks stay hawkish longer.
• Pair long XLE / short XLP only if oil stays firm for another 4-6 weeks; otherwise fade the trade. Food and consumer staples can outperform on pass-through, but energy retains the cleaner earnings leverage while the shock is still unfolding.
• Tactically trim broad index exposure on strength and rotate into defensives with pricing power; the risk/reward is skewed toward downside if the market continues to discount a rapid normalization that the supply chain evidence has not yet confirmed.