The increase in consumer prices between January and February suggests that the threat of deflation may be less imminent than it appeared during the previous five months of falling prices. Whereas three provinces actually posted negative inflation rates in January, all posted positive inflation rates in February.
Today’s Bloomberg report begins by noting that this data “may ease pressure on the Bank of Canada to take additional measures to stem the recession.” If central bankers were to interpret today’s inflation numbers as a call to inaction, that would be a misinterpretation.
The risk of deflation has not disappeared. One month does not make a trend, especially since February’s up-tick was driven by volatile items such as gasoline, food and mortgage-interest costs. The Bank of Canada’s core inflation rate (which excludes these items) did not increase at all, remaining below the 2% target.
In formulating monetary policy, today’s better-than-expected inflation report must be weighed against worse-than-expected reports on output and employment. Even if the prospect of deflation has diminished, the Canadian economy still needs all possible stimulus to restore growth and create jobs. The Bank of Canada was right to raise the possibility of “credit and quantitative easing” and should also consider targeting a 0% interest rate.
UPDATE (March 20): Quoted by Canadian Press