on inflation movements from month to month. given these uncertainties, it is not realistic to expect our policy instrument to control inflation down to tenths of a percentage point. in fact, the two - percentage - point inflation - control range is a reasonable approximation of the degree of precision that we can expect to achieve. it is much like piloting a boat in rough water : the boat is buffeted in one direction or the other, and the pilot must continuously adjust the heading so that the fluctuations average to zero in order to arrive at the desired destination. to help steer through these short - term fluctuations in inflation, we make use of various measures of core inflation. these measures help us judge the underlying trend of inflation — the rate we would see if no sector - specific or one - off factors were at work. put another way, these measures help us separate inflation ’ s signal from its noise. 1 / 6 bis central bankers'speeches the underlying trend in inflation is driven by the laws of supply and demand, which are as applicable today as they ever were. excess demand pushes inflation up ; excess supply pushes inflation down. central banks exploit this relationship, working to create excess demand or excess supply in the economy, to target the inflation rate. a central role in this relationship between the economy and inflation is played by inflation expectations. the more anchored those expectations are, the more quickly the economy will find its way back to normal after an economic shock. this is known as the credibility dividend : a credible central bank will see inflation expectations well anchored at the target level and will have a relatively easy time restoring normality after a shock. what this means is that the underlying trend in inflation may become more stable as expectations become more anchored. in short, the more successful the inflation target is, the less obvious the relationship between economic shocks and inflation will become. but that does not mean that the relationship is no longer there. the relationship between inflation and excess demand or supply really represents a summary of a number of more complex underlying linkages between companies and the labour market. consider a company that finds itself running at full capacity. if it sees increased demand for its product and expects that demand to persist, the company is likely to invest in new capacity and expand its workforce. if unemployment is already low, the company may have to increase wages to attract new employees. over time, higher wages can add to inflationary pressure. this is how excess demand works its way through the system and translates into higher inflation.

bis central bankers'speeches in many other advanced economies, core inflation was soft throughout 2016, even as excess supply was being absorbed. and unlike in the united states, this softness has come mainly from goods prices. bank staff have identified exchange rate movements and low export prices in emerging - market trading partners as factors acting as a drag on core inflation in these economies. here in canada, total inflation slowed over the first half of this year and has stayed in the lower half of the target range, even as our output gap has been closing rapidly. both total and core inflation have firmed in the past couple of months. still, since the middle of last year, an average shortfall in inflation of 0. 7 percentage points has been unexplained by fundamental drivers. the factors behind this weakness include below - average food inflation, caused by a combination of abundant crop supplies and increased competition in the retail sector. another special factor is the impact of the ontario government ’ s reduction in electricity prices. like the united states, these one - off factors account for roughly two - thirds of this year ’ s shortfall in total inflation in canada. the bottom line is that the fundamental drivers of inflation, along with some special factors we can identify, can explain the recent behaviour of inflation reasonably well. certainly, the remaining shortfall is well within a reasonable margin of error, given that we are working with statistical relationships. furthermore, the underlying trend in inflation is well within the target range we have committed to. in short, we understand inflation well enough for policy purposes. nevertheless, like all central banks, we would prefer to understand inflation perfectly and are not content to leave even a few tenths of a percentage point unexplained. we are working hard on this, and this research agenda is what i turn to now. searching for other inflation drivers bank staff have examined 20 years ’ worth of inflation data from 10 advanced economies and the euro area. they used statistical techniques to look for inflation factors that these countries might have in common. the first factor they found in common is fluctuations in food and energy prices across countries — as it turns out, these can explain almost half of the movements in total inflation. this makes sense, as food and energy prices are driven by global commodity prices. but we generally look through movements in food and energy prices when we are assessing the underlying trend of inflation. so, this common factor does not add much to our understanding. looking beyond commodity prices, bank staff found