Flirting with Deflation
This morningâ€™s Consumer Price Index data reveals that the national inflation rate fell to 0.1% in May. Four provinces – Alberta, New Brunswick, Nova Scotia, and Prince Edward Island – posted negative inflation rates.
The supposed risk of continuing fiscal and monetary stimulus too long is that they could propel accelerating inflation. The Finance Minister and Bank of Canada GovernorÂ have recently begun proposing an â€œexit strategyâ€ from stimulative policies. This weekendâ€™s statement from G-8 Finance Ministers also called for â€œexit strategies.â€
Todayâ€™s inflation numbers confirm that this talk is wildly premature, particularly as far as Canada is concerned. Our inflation rate will almost certainly turn negative before beginning to increase. Governments and the Bank of Canada have ample time to press ahead with stimulus policies before rising inflation becomes a meaningful concern.
Japan is the only advanced capitalist country that has much experience with â€œquantitative easing.â€ Recent Japanese history provides no evidence that this policy leads to excessive inflation.
The greater risk today remains deflation, a sustained decline in prices that could prompt consumers to delay purchases in anticipation of even lower prices. This reduction in consumer demand would prompt businesses to produce less and lay off more workers, which would further undermine demand and prices.
An important caveat is that Canadaâ€™s inflation rate will probably turn negative because gasoline prices are lower now than they were in 2008. The decline in gasoline prices is not synonymous with more generalized deflation. Nevertheless, the threat of deflation still outweighs the more remote possibility of accelerating inflation.