economy and its commitment to achieving the 2 % inflation target. today i will provide an update on economic developments, with a focus on inflation and the forces behind it. i will also review the role of monetary policy in bringing inflation back to target. finally, i want to look ahead to the next phase of our balance sheet management and the mechanics of qt. like so many things that have happened during the pandemic, this will be new territory for canadians, and i want to ensure the process is clear and transparent ahead of time, so that everyone understands what comes next. economic update since january the canadian economy is robust. growth of gross domestic product in the fourth quarter was very strong at 6. 7 %, reinforcing our view that economic slack in the economy has been absorbed. and growth in the first quarter of 2022 looks more solid than previously projected. as expected, inflation has remained high. inflation control is our number one job at the bank, so i want to explain what is driving these price increases and what canadians can expect looking ahead. since last spring, consumer price index ( cpi ) inflation has surged well above our target range of 1 % to 3 %. in january, cpi inflation was 5. 1 %. the russian invasion of ukraine is driving up international prices for oil, wheat and other commodities. this will put further upward pressure on inflation in canada and around the world. setting aside the crisis in ukraine, the surge in inflation we have seen since last spring largely reflects pandemic - related shifts in global supply and demand. but this rise in inflation has been larger than we expected six months ago, and price increases have broadened. so i want to take a closer look at the forces at play. one indication of the unusual forces at play is the large gap that has opened up between different measures of core inflation. all three of our core measures have increased in recent months. cpi - common, which is more related to inflation in services and less influenced by global supply disruptions, was only 2. 3 % in january. in contrast, cpi - median and cpi - trim, which have been more influenced by the prices of globally traded goods, were 3. 3 % and 4. 0 %, respectively ( chart 1 ). - 3chart 1 : inflation measures are elevated % year - over - year percentage change, monthly data - 1 total cpi cpi - common cpi - trim sources : statistics canada and bank of canada calculations cpi - median target last

market. and banks in turn rely on shadow banking for funding, for example, through repo residential mortgage backed securities or covered bonds. what went wrong? the weaknesses of both traditional banking and shadow banking were clearly exposed during the global financial crisis : both proved vulnerable to run - like behaviour despite features intended to bolster confidence. a number of core funding markets froze up as financial institutions lost the confidence to lend to one another. the flight from counterparty risk reflected the vulnerabilities of many banks, as well as the fragility of the shadow banking system. i won ’ t dwell on the vulnerabilities of the banks and how they are being addressed, since that has been discussed in considerable detail elsewhere, but i will discuss some of the weaknesses exposed in global shadow banking. during the crisis, repo markets came under severe stress. market makers and cash lenders became less able and willing to provide repo financing, and, as a result, some repo borrowers experienced difficulties financing even good - quality collateral. borrowing limits were reduced, the terms of transactions shortened, haircuts on private securities accepted as collateral widened and the range of securities accepted as collateral narrowed down to all but the safest. the volume of repo transactions dropped off sharply. such strains were experienced in canada and around the world. markets for various asset - backed securities collapsed. in the united states, markets for mortgage - backed securities and various other structured products essentially closed : issuance stopped, prices fell sharply, and perceptions of these securities ’ safety were badly damaged. canada experienced its own crisis in non - bank asset - backed commercial paper in mid - 2007 ; only coordinated action by the public and private sectors prevented potentially catastrophic system - wide repercussions. money market funds in the united states experienced substantial drains, as fears emerged that these funds would have to “ break the buck. ” the federal reserve introduced extraordinary liquidity facilities and the united states government provided temporary guarantees to halt a full - fledged run. these developments were similar to traditional bank runs – a general withdrawal of participation from certain markets for fear of counterparty risk. they also exposed the risks associated with the use of collateral as it became more difficult to value and dispose of in illiquid markets. we saw that as the system came under stress, market participants faced the prospect of unloading collateral at fire - sale prices – in many cases exposing institutions to “ wrong - way ” risks for which they were inadequately prepared. 2