##s from that midpoint, is meant to make it clear that we are not indifferent to the various outcomes in the target range. rather, we consistently aim to get back to 2 per cent over a horizon of 1 1 / 2 to 2 years. following such a practice means that the average inflation rate over successively longer periods of time will tend to be increasingly close to 2 per cent. until last year, the bank of canada used as its core measure of inflation the cpi excluding food, energy, and the effect of changes in indirect taxes. volatile food and energy prices tend to reverse themselves fairly quickly. therefore, since monetary policy actions affect inflation over a longer period, it would be inappropriate for monetary policy to try to offset the short - run movements in the total cpi caused by these fluctuations. among food components, however, only fruit and vegetable prices are highly volatile. and among energy components, electricity prices have not been particularly volatile in canada. thus, our new measure of core inflation excludes only the volatile components of food and energy, as well as the three other most volatile components of the cpi : tobacco prices, intercity transportation prices, and mortgage interest costs. as before, the effect of changes in indirect taxes on the remaining elements is also excluded. not only does the new measure of core inflation have a stronger statistical basis for its creation, it is historically a better predictor of future total cpi inflation than the old measure. overall, we expect that these refinements will help to further increase the predictability of inflation in canada in the years to come. this should add to the benefits that the canadian economy has experienced from having a credible anchor in the form of the inflation - control targets. see bank of canada ( 2001 ). this is shown in crawford ( 2001 ). macklem ( 2001 ) provides further details on the new measure of core inflation and its properties.

that resides in the central bank, it is important that the bank provide the research and analysis regarding the framework that can deliver the agreed objective. an agreement was indeed reached. it was announced in the form of a joint press release on the inflation - reduction targets at the time of the february 1991 budget. the bank issued a detailed background document at that time elaborating on the framework it would use to achieve the targets. given the empirical evidence for canada, showing that the appropriate horizon for aiming at an inflation target was about 1 1 / 2 to 2 years, the first formal target was set for december 1992 at a rate of 3 per cent ( plus or minus 1 per cent ). the series of targets announced in the agreement was aimed at bringing the 12 - month cpi inflation rate down to 2 per cent ( again, plus or minus 1 per cent ) by december 1995. the decline in inflation was achieved in fairly short order, indeed faster than was consistent with the targets. by january 1992, inflation was close to 2 per cent. the agreement with the government has been renewed three times ; in each case, the midpoint of the inflation target range has been confirmed at 2 per cent. through this period — and with two different governments — there has been a growing shared appreciation of what inflation control has been contributing to canada ’ s good economic performance. this includes the recognition of the automatic stabilizing feature of inflation targeting in response to demand shocks — a point that i will come back to later. overall, the government and the central bank are on the same wavelength in terms of the objective of policy. the successful implementation of a monetary policy aimed at low, stable, and predictable inflation and a fiscal policy aimed, in most circumstances, at running a small surplus with the goal of bringing about a significant decline in the debt - to - gdp ratio has enhanced the credibility of both policies. the major lesson that we at the bank of canada draw from our experience with inflation control is related to the advantages of establishing a credible anchor for monetary policy by focusing on the predictability of inflation. that will be the theme of the rest of my talk. establishing a credible anchor by focusing on predictability when the original inflation - reduction targets were announced in early 1991, the bank was not relying on a credibility effect to reduce inflation. and subsequent studies have shown that this was the appropriate assumption — there was no evident reduction in the cost of disinflation arising from credibility. what the bank did say was that