percentage points % 1960q1 1970q1 1980q1 1990q1 2000q1 2010q1 2020q1 to to to to to to to 1969q4 1979q4 1989q4 1999q4 2009q4 2019q4 2022q3 average inflation ( left scale ) standard deviation of inflation ( right scale ) note : averages and standard deviations have been computed from underlying annualized quarter - over - quarter inflation rates. sources : organisation for economic co - operation and development via federal reserve economic data and bank of canada calculations last observation : 2022q3 chart 2 : strong positive relationship between the level and volatility of inflation across countries standard deviation of inflation ( percentage points ) decadal summary statistics average inflation ( % ) 1980s 1990s 2000s 2010s note : the sample consists of 37 advanced and emerging economies, including most of the organisation for economic co - operation and development. averages and standard deviations have been computed from underlying monthly year - over - year percentage changes. observations for all countries are not available for all months. observations involving extreme inflation outcomes have been excluded ( decadal average > 20 %, decadal standard deviation > 10 percentage points ). dotted lines denote decade - specific lines of best fit. each dot represents a mapping between the standard deviation of inflation and average inflation, for a given country in a given decade. sources : organisation for economic co - operation and development last observation : december 2019 via haver analytics, and bank of canada calculations - 6as firms begin to rely on this rule of thumb, it becomes self - reinforcing. the inflation outcomes that result from the price - setting decisions of firms start falling in line with the central bank ’ s target, and this makes the rule of thumb even more reliable going forward. the rule of thumb therefore reduces feedback loops and helps ensure that any straying from the inflation target is relatively small and short lived. with these self - stabilizing mechanisms at work in the economy, monetary policy can pursue its inflation target with a high degree of flexibility. in an environment of low and stable inflation, the inflationary effects of shocks tend to be muted. monetary policy can therefore look past many of these shocks and respond to others in a more measured way. this flexibility allows monetary policy not only to keep inflation low and stable but also to minimize the impacts of shocks on the labour market and the broader economy. this is a key benefit of successful inflation targeting and an important reason why the bank is working so

##lity in firms ’ costs tends to be absorbed into firms ’ profit margins when inflation is low. this lessens the likelihood of feedback into other firms ’ costs and prices. it also helps explain why low inflation tends to go hand in hand with less volatile inflation. we can see this pattern within countries over time ( chart 1 ) and across countries ( chart 2 ). much as with cost pressures, a self - stabilizing mechanism can take hold around expectations when inflation is close to target. when a central bank has built up a credible track record of stabilizing the economy around a low inflation target, firms tend not to pay much attention to inflation. rather than basing their expectations on recent rates of inflation or on short - term shocks hitting the economy, they ’ re more inclined to settle on a simple rule of thumb that says inflation should continue to evolve in line with the central bank ’ s target. for a formal model in which firms find it optimal to increase the frequency of their price adjustments when trend inflation is high, see, for example, m. dotsey, r. g. king and a. l. wolman, “ state - dependent pricing and the general equilibrium dynamics of money and output, ” quarterly journal of economics 114, no. 2 ( 1999 ) : 655 – 690. 3 for example, in standard new keynesian models, the weight on firms ’ marginal costs in the phillips curve governing inflation typically increases in a structural parameter representing the frequency with which firms adjust their prices. see, for example, f. smets and r. wouters, “ shocks and frictions in us business cycles : a bayesian dsge approach, ” american economic review 97, no. 3 ( 2007 ) : 586 – 606. 4 for a complementary mechanism that also helps to make inflation more volatile when it ’ s high, see m. harding, j. linde and m. trabandt, “ understanding post - covid inflation dynamics, ” bank of canada staff working paper no. 2022 - 50 ( december 2022 ). - 5chart 1 : strong positive relationship between the level and volatility of inflation within countries over time a. united states b. canada percentage points % 1960q1 1970q1 1980q1 1990q1 2000q1 2010q1 2020q1 to to to to to to to 1969q4 1979q4 1989q4 1999q4 2009q4 2019q4 2022q3