potential. beyond these factors, there have been repeated relative price fluctuations — in electricity prices and from increased competition in food retailing, for example — which have temporary effects on inflation and should be looked through. moreover, there may also be some drag on inflation from globalization and digitalization. when we put it all together, we see that inflation has been behaving well within the normal zone of statistical and policy tolerance. i am not claiming that our understanding of inflation is perfect, complete and unchanging. far from it. we will continue to look closely at forces such as globalization and digitalization so that we can better understand how they are influencing the inflation process. there are always uncertainties in economics. that is why forecasts are best thought of as ranges, rather than points, and why our inflation - control framework is based on a target band. the bottom line is that inflation targeting has worked, through good times and bad, for more than 5 / 6 bis central bankers'speeches 25 years. it continues to work today. and canadians can be confident that it will continue to work for years to come. 6 / 6 bis central bankers'speeches

in projections on growth, 0. 5 % or thereabouts for both 2015 and 2016, but what surprised some people in the markets was that you also expect inflation to pick up substantially between 2015 and 2016, going from 0 % to 1. 5 %, and then to 1. 8 % in 2017. some regard this as too optimistic. the pickup in headline inflation is largely due to a base effect, namely the fact that the impact on annual inflation of the drop in the price of fuel and other goods influenced by the price of oil will disappear later this year. the gradual increase in the price of oil that markets expect to see over the projection horizon and which forms part of our assumptions will also give support to our headline inflation projections. the more relevant question is on core inflation when you take the price of food and energy out : this is now at 0. 7 %. it gets close to 2 % in 2017, converging with headline inflation. the first element in the increase of core inflation is the pass - through of the exchange rate, which is the most important impact. the second source is the indirect effect of oil prices, for instance through transportation costs. then we have the closing of the output gap, which might lead to firms regaining some pricing power. most analysts have been discussing our assumption of the closing of the output gap by end of 2017. some people argue that the output gap cannot be closed with such high unemployment. but the labour market can be tight in spite of massive unemployment if observed unemployment is all structural in nature. it ’ s difficult to say today, but we think there will be somewhat higher wage increases in 2017, in spite of a still high jobless rate, because bis central bankers ’ speeches we expect the structural component of unemployment to remain large in 2017. but the key assumption giving support to the projected inflation is not a vigorous pickup in wage costs – which in fact are going to remain moderate – but rather firms regaining pricing power. in the last year producer prices have been negative. profits of firms have been under pressure not only because of volumes but also because of prices. central banks normally tend to look through oil prices. why did you have to act? as i said, there was uneasiness about the serious risks of de - anchoring in inflation expectations. maintaining price stability is the core mandate of the ecb. in 2003 the ecb announced that, in order to avoid risks of deflation, inflation should be below but close enough to 2