During 2022, Canada's annual inflation rate, measured by the Consumer Price Index (CPI), accelerated well beyond the Bank of Canada's target range of 1% to 3%, peaking near 6.8%. A primary driver was the surge in global energy prices and persistent supply chain disruptions, which pushed up transportation and heating costs.
Statistics Canada reported that this rapid increase heavily impacted lower-income households. Essential items represent a larger share of their overall budget, leaving them with limited disposable income for non-discretionary goods. To cope with rising living costs, many households have turned to unsecured lines of credit and credit cards.
Real wages have fallen as nominal wage growth (average hourly wages rising by 3.2%) failed to keep pace with the headline consumer price inflation rate. In response to the persistent inflationary pressures, the Bank of Canada aggressively raised its policy interest rate by 50 basis points to cool down demand.
With reference to Extract A, explain two likely economic effects of the higher rate of Canadian inflation.
