In July, the Consumer Price Index posted an annual decline of 0.9%, the most negative inflation rate since July of 1953. This decline is troubling not only because it is larger than last month’s decline, but also because it is more widespread.
Recent decreases in inflation have mainly been driven by lower gasoline prices in 2009 compared to 2008. This fact has tempered concerns about a generalized decline in prices prompting consumers to delay purchases in anticipation of even lower prices and businesses cutting back output in response to this reduction in consumer demand.
While such a deflationary spiral is still unlikely, today’s numbers confirm that deflation remains a more serious threat than rising inflation. Price declines were more widespread in July than in previous months. Month-over-month, four of eight Consumer Price Index components were in negative territory.
A similar broadening occurred geographically. Whereas June’s price-level decline had been concentrated in four provinces, eight provinces posted negative inflation in July. In particular, the two largest provinces (Ontario and Quebec) dropped into deflation.
The solution to deflation is, of course, stimulative monetary and fiscal policies. Even if such policies are not needed to end deflation, the fact that inflation is negative leaves ample room to pursue them without risking excessive inflation.
For example, if stimulus policies were to produce a 4% jump in inflation relative to today, Canada’s inflation rate would still only be 3%. While at the upper end of the Bank of Canada’s target range, such inflation would hardly be catastrophic. Indeed, policymakers should be quite willing to incur such an inflation rate in the process of restoring growth in output and employment.
For more on the policy implications of negative inflation, please see last month’s Consumer Price Index commentary.