While some prices rose slightly and others fell slightly between July, August and September, the total Consumer Price Index has remained exactly the same through these months. The annual inflation rate declined by 0.9% in September, tying July for the largest rate decline since 1953. All provinces but Saskatchewan now have negative inflation.
While the main story continues to be lower energy prices in 2009 compared to 2008, this morning’s numbers provide some indication of a more general downward trend. The Bank of Canada’s core inflation rate, which excludes energy, declined for a fourth consecutive month. Specifically, it fell to 1.5%, the lowest core rate in more than a year.
The stronger Canadian dollar, which should lower import and commodity prices in Canada, may be aggravating the deflationary effects of lower energy costs. In particular, the exchange rate could help explain why Canadian prices remain flat while American prices are increasing slightly.
However, not all of the loonie’s value is being passed along to Canadian consumers. The OECD’s latest figures on purchasing power are for August, when the Canadian dollar bought as much in Canada as 89 American cents in the US. But the Bank of Canada’s figures indicate that the Canadian dollar traded for an average of 92 Americans cents that month.
The key policy implication of this morning’s numbers is that concerns about rising inflation remain entirely hypothetical. The Government and Bank of Canada are still free to pursue expansionary fiscal and monetary policies without stoking excessive price increases. Indeed, the central bank could and should sell Canadian dollars on world markets to moderate the exchange rate.
Even if an enlarged money supply (or government stimulus spending) added to domestic inflation, it would not be a major problem. For example, if the national inflation rate were boosted by four percentage points, it would be 3%. Given that the Bank of Canada’s target range runs from 1% to 3%, that outcome would hardly be calamitous.
UPDATE (October 17): Quoted in The Toronto Star