In June 2022, Canada's annual inflation rate accelerated to 8.1%, its highest level in nearly 40 years. This rapid escalation caught many economic analysts off guard, significantly outpacing the Bank of Canada's early-year projections. This rate was more than four times the central bank's midpoint target of 2%.
A primary driver of this surging inflation was energy costs; gasoline prices rose by more than 50% year-on-year. Furthermore, global supply chain disruptions severely restricted the supply of essential manufacturing inputs, such as semi-conductors, which limited the global and domestic production of new passenger vehicles. Concurrently, consumer spending on services and tourism surged rapidly following the lifting of domestic public health restrictions, driving demand far past existing capacity.
In normal circumstances, such high inflation would trigger immediate and decisive monetary tightening. Despite mounting risks of a domestic economic slowdown, the Bank of Canada's Governing Council aggressively increased its benchmark policy interest rate from 0.25% to 2.5% by July 2022.
With reference to Extract C, explain two reasons for the increase in the rate of inflation in Canada.
