14 months. nevertheless, it is still running at close to 3. 5 %, because it also excludes prices that have declined sharply. so the underlying trend shows inflation is still well above target. and the longer the underlying trend remains too high, the harder it can be to bring inflation down. why? because when households and businesses expect inflation to be above 2 %, buying patterns and corporate pricing behaviour adjust. when that happens, it becomes more difficult to bring inflation back to 2 %. looking ahead, we want to see less - generalized price increases as well as a decline in the average price increase. both of those things are happening, but they need to keep happening to restore price stability for canadians. slowing demand that brings me to the other factor we ’ re watching closely : the balance between demand and supply in the economy. inflation has come down from 8 % because supply chains have opened up, energy prices have fallen and the big price increases of a year ago have dropped out of the data. for inflation to continue to decline, we need demand to continue to grow more slowly than supply for a period of time. that will relieve price pressures, slow increases in labour costs and restore normal price - setting behaviour. and that ’ s what will bring inflation sustainably back to target. but i want to be clear — we are not trying to kill economic growth. we want strong, sustainable growth and a healthy labour market. the best contribution we can make to these objectives is to deliver low, stable and predictable inflation. price stability is a cornerstone of a market - based economy — without it, nothing works well. the way we achieve price stability is by using the policy interest rate to find a balance between demand and supply in the economy. too much demand, and inflation rises above target. too little, and inflation falls below target. we ’ ve seen both in the last three years. at the beginning of the pandemic, demand collapsed and inflation fell below 1 % — and was even briefly negative. we used all of the tools at our disposal to support the economy so that - 6canadians could continue to pay their bills, businesses could stay afloat and people would have jobs to go back to when the shutdowns ended. as economies around the world reopened, supply chains became tangled and demand for goods and services came roaring back. businesses could not keep up with demand, prices rose quickly and inflation became a big problem. the shift into excess demand required the opposite policy reaction

open up this year would have closed by the end of 2004. we projected that core inflation would likely fall to about 2 1 / 2 per cent in the second half of this year and to about 2 per cent by early 2004 as some of the special factors pushing up inflation ran their course. we also pointed out that total cpi inflation would continue to be importantly affected by swings in crude oil prices and that it would likely fall temporarily below the core rate in the first half of 2004 before steadying out at a rate close to core inflation. factors influencing monetary policy in the april monetary policy report, we listed a number of factors that we intended to watch closely as we set monetary policy. these factors are the pace of economic expansion in the united states and overseas, the strength of domestic demand, financial market conditions, and the evolution of inflation and inflation expectations. so, let me review how we have seen these factors evolving. i ’ ll start with the external environment. in europe, domestic demand and economic growth have continued to disappoint. japan ’ s economy has also remained weak. while demand growth in the rest of asia has been strong, the outbreak of severe acute respiratory syndrome ( sars ) is clearly going to slow growth in some countries. in the united states, domestic demand has not been recovering as quickly as expected, which has negative implications for canadian exports, at least over the short term. consumer spending continues to underpin economic activity in that country. however, business fixed investment has not yet picked up. expectations as to when the u. s. recovery will occur have been pushed back until late this year when confidence levels should improve, and when the impact of very expansionary monetary and fiscal policies should begin to be fully felt. now, let ’ s turn to the second factor - domestic demand in canada. on the whole, demand has remained quite strong, supported by a healthy employment market, low interest rates, and a recovery in corporate profits. while growth in consumer spending slowed slightly in the first quarter, it was still quite strong, especially on housing. governments and businesses both increased their spending. as a result of strong domestic demand, gross domestic product grew at an annual rate of almost 2 1 / 2 per cent in the first quarter, up from about 1 1 / 2 per cent in the final quarter of 2002. in nova scotia, we are seeing some fall - off in consumer spending. business investment prospects have also been dampened by the postponement of natural gas projects