- 20 - 20 - 40 - 40 sources : abs ; rba while this lift in energy prices explains some of the surge in inflation, it is by no means the full story. we can make some further progress in understanding this surge by using the standard workhorse models of inflation, which explain inflation by inflation expectations and the aggregate output gap. strong demand at a time of impaired supply – and thus a closure of the output gap – certainly helps explain part of the recent higher inflation. but these models fall well short of explaining the magnitude of the lift in inflation and, in my view, face some real challenges. one of these challenges is that the focus on the aggregate output gap is insufficient in a world in which shocks are highly uneven across sectors. we need to pay more attention to developments in individual sectors. one of the distinguishing features of the past two years is that the shocks have been highly asymmetrical. in 2020 and 2021 there was a huge increase in demand for goods and a decline in demand for services. this was particularly evident in the united states, where the demand for goods surged by close to 20 per cent in less than a year and the demand for many services was weak ( graph 5 ). a similar, although less pronounced, pattern was evident in australia. r e s e r v e b a n k o f au s t r a l i a graph 5 consumption december 2019 = 100 index united states index australia goods services sources : abs ; rba ; refinitiv this surge in demand for goods occurred at the same time as the supply side was constrained. this was partly because covid interrupted production. but it goes beyond this. even in good times, the supply side would have had trouble coping with a 20 per cent surge in demand in a short period of time. just - in - time inventory management and long supply chains had made the system less resilient and less able to respond to rapid and unexpected shifts in demand. the result was that many industries quickly found themselves on the sharply upward sloping part of the supply curve, and prices increased. and there was no offsetting deflation in those parts of the economy where demand was weak. one lesson here is that what is happening at the sectoral level is important in influencing the overall inflation dynamics in our economy – it ’ s not just the aggregates that matter. [ 3 ] resources don ’ t move freely between sectors, which means that the composition of demand and supply is important, not just

tiff macklem : opening statement before the house of commons standing committee on finance opening statement by mr tiff macklem, governor of the bank of canada, before the house of commons standing committee on finance, ottawa, ontario, 30 october 2023. * * * good afternoon. i'm pleased to be here with senior deputy governor carolyn rogers to discuss our recent policy announcement and the bank of canada's monetary policy report. last week, we maintained our policy interest rate at 5 %. we held our policy rate steady because monetary policy is working to cool the economy and relieve price pressures, and we want to give it time to do its job. but further easing in inflation is likely to be slow, and inflationary risks have increased. before i take your questions, let me give you some economic and financial context for the decision. since the last time we were here with you, the canadian economy has slowed, and the data suggest demand and supply are now approaching balance. we're now seeing clearer evidence that higher interest rates are moderating spending and relieving price pressures. the economy has entered a period of weaker growth, with growth averaging about 1 % over the last year. growth in gross domestic product ( gdp ) is forecast to remain below 1 % for the next several quarters before picking up in late 2024 and rising to 2½ % in 2025. with the economy expected to move into excess supply this year and with growth anticipated to be weak for the next few quarters, we think there's more inflation relief in the pipeline. we expect inflation in canada to ease gradually and return to our 2 % target in 2025. but we're worried that higher energy prices and persistence in underlying inflation are slowing progress. the effects of higher interest rates on inflation are most evident in the prices of durable goods, like furniture and appliances that people often buy on credit. these effects have also spread to many semi - durable goods - a category that includes things like clothing and footwear - as well as many services excluding shelter. inflation in these categories is now running generally at or below 2 %. price increases for groceries, while still elevated at almost 6 %, have also eased and are expected to moderate further. however, a number of factors are getting in the way of low inflation. higher global energy prices are increasing prices at the pump. and that is pushing headline inflation back up. structural supply shortages in our housing market are boosting prices for shelter. in addition, near