per cent target jointly adopted by the bank and the government of canada, and to return production in the real economy to its capacity level, since satisfying these two conditions generally goes hand - in - hand. since 1995, the target has been to achieve an annual rate of total inflation of 2 per cent – the midpoint of a control range of 1 to 3 per cent – as measured by the consumer price index ( cpi ). the target is reviewed jointly with the federal government approximately every five years, and was last renewed in 2011. see bank of canada, “ renewal of the inflation - control target : background information – november 2011. ” bis central bankers ’ speeches eliminating excess supply in the economy and returning inflation to target are not enough, however. the second challenge is unbalanced economic growth. the sources of growth must be well balanced for growth to be sustainable. a rapid return to potential is neither sufficient nor desirable, if it is only temporary and purchased at the cost of future instability and lower growth. what do i mean by unbalanced economic growth, you might ask? why isn ’ t all growth, by whatever means, good? in today ’ s economy, a lack of balance implies growth that has relied too heavily on increases in household spending – in particular, the purchase of houses, with a resultant rapid increase in household debt. future growth, if it is to last, needs to draw more support from business fixed investment and exports. during the depths of the last recession, demand for our exports collapsed, and extraordinarily accommodative monetary policy was needed to boost domestic demand in order to support employment and income ( chart 5 ). the bank ’ s timely and aggressive policy actions – combined with extraordinary fiscal stimulus – worked, with extra internal demand effectively substituting for weak external demand. however, there are limits to how far this can be taken. the household sector is now largely played out ; pushing it much further could lead to trouble. so we are left with an economy that in many respects has done well, but one in which both output and inflation are roughly 1 per cent below where they should be, and where the sources of demand need to be rotated. 2 macroeconomic puzzles the bank ’ s base - case projection, as presented in our january monetary policy report, has output returning to potential and inflation gradually returning to target in roughly two years. setting the bank ’ s overnight interest rate – the bank ’ s primary monetary policy instrument – at the appropriate level

even prior to the events of the last year. inflation and decoupling up until now, i have been discussing whether movements in economic activity have or have not decoupled from each other. but whether or not business cycles have diverged, it is clear that the sharp increase in many commodity prices has given rise to highly coincident increases in inflation rates around the world. in industrialized economies, such as the united states, rising inflation has chiefly reflected the surge in energy prices, whereas in developing countries, for which food takes up more of household budgets, rising food costs have been a more important culprit. the reasons for the trajectory and persistence of increases in prices of food and energy this year, as global growth has moderated, are not entirely clear. the upward trend in prices of food and energy over the past several years, however, importantly reflects the pressures posed by rapidly growing demand in developing economies against relatively inelastic global supplies of commodities. for the moment, higher headline rates of inflation have shown only a few tentative signs of embedding themselves in core inflation or in longer - term inflation expectations. however, policymakers around the world must monitor the situation carefully for signs that the increases in relative prices globally do not generate persistently higher inflation. additionally, in those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability. conclusion to sum up, the evidence sometimes presented as indicative of a divergence in economic performance, referred to as decoupling, is not definitive. it is certainly the case that in recent quarters, the u. s. economy slowed to a greater extent than other industrial economies, and economic activity in the industrial economies, in aggregate, has slowed more than in the emerging market economies. this experience contrasts with that near the start of this decade, when the economic downturn of 2001 through 2002 was felt more uniformly throughout the global economy. in addition, financial conditions in most emerging market economies have remained relatively stable, considering the turmoil that overtook industrial country financial markets over the past year. even so, neither economic growth nor financial markets in the different regions of the world moved in lockstep in the past, nor are they expected to do so across all business cycles. it is far from clear that the divergences in performance we have seen of late, which are tentative in any event, represent distinct breaks from historical benchmarks. the