is also declining as canadians households experience a reduction in their net worth. this reflects lower commodity prices, as well as steep declines in consumer and business confidence. that said, the canadian economy is expected to begin recovering later this year and to accelerate to above - potential growth in 2010 as policy actions begin to take hold and with support from the past depreciation of the canadian dollar. on an annual average basis, then, real gdp is projected to decline by 1. 2 per cent in 2009 and to rebound by 3. 8 per cent in 2010. what does this mean for inflation? it means that we should expect a temporary divergence between headline and core inflation in the coming quarters. reflecting the sharp year - onyear falls in energy prices ( and assuming that energy prices follow recent prices in the oil futures markets ), total cpi inflation should fall relatively abruptly, dipping below zero in the second and third quarters of 2009. i want to emphasize that this projected brief period of falling prices does not signal the onset of deflation for four reasons. first, most prices will not, in fact, be falling. at present, the prices of more than half the goods in the cpi basket are actually rising at more than the 2 per cent target. second, while core cpi inflation in canada should ease through 2009, its anticipated low should be 1. 1 per cent in the fourth quarter of this year – still within the target range for total cpi. third, consistent with the past experience that i referred to earlier, and reflecting the accommodative stance of monetary policy, we expect total cpi inflation to begin to converge towards core, starting at the end of this year, reaching 2 per cent by mid 2011. fourth, we should again see the benefit of well - anchored inflation expectations in helping to return actual inflation to the target. while measures of near - term inflation expectations have been volatile recently, reflecting the sharp swings in energy prices, over the longer term, they remain well anchored at 2 per cent. indeed, the consensus economics'forecast for total cpi inflation in 2009 fell to 0. 7 per cent in january, but moves back up to 1. 9 per cent for 2010. consensus expectations farther out remain at 2 per cent. this pattern in near - and medium - term inflation expectations is very similar to what we saw during the sharp commodity - price spike last spring. at that time, short - term expectations moved up sharply while medium term expectations remained anchored at 2 per cent. these expectations proved

tools " to maintain price stability. with this backdrop, the question is being asked whether sustained deflation could happen here in canada. the possibility is actually remote for three reasons. first is the resilience of our economy. the canadian economy has a number of advantages : labour, product, and capital markets that are flexible and open ; one of the soundest banking systems in the world ; and households, corporations, and a public sector that have considerable financial flexibility. so while our economy will be tested by the current global crisis, it is well positioned to respond. second, a floating currency means that we have an independent monetary policy. quite simply, we are in control of our own monetary destiny. third, we have used that monetary independence to great advantage. as one of the pioneers of inflation targeting, canada has deep experience with the clearest, most powerful monetary policy framework. the advantages of that framework have been demonstrated, with inflation brought down and kept low and stable since the early 1990s, and they are equally relevant in times of disinflationary pressures. to underscore this point, and before turning to the outlook for growth and inflation, let me review the bank's monetary policy framework. inflation targeting in its simplest terms, monetary policy is concerned with how much money circulates in the economy, and what that money is worth. the single, most direct contribution that monetary policy can make to sound economic performance is to provide canadians with confidence that their money will retain its purchasing power. that means keeping inflation low, stable and predictable. monetary policy makers have learned over decades that it pays to be precise about this objective. the cornerstone of the bank's monetary policy framework, therefore, is its inflation target which since 1991 has been set jointly with the government of canada. the target aims to keep the annual rate of inflation, as measured by the cpi, close to 2 per cent – the midpoint in a range of between 1 and 3 per cent. the agreement sets out one clear objective – the inflation target – and the bank is accountable to canadians through its open and transparent communication of success in achieving that objective. if inflation deviates from the target, the bank will explain the reasons why, what it will do to return it to target, and how long the process is expected to take. our monetary policy report update, released last thursday, is an example of that communication. canada has been served extremely well by its inflation - targeting policy framework, which has been widely em