Canada’s extended summer of deflation ended in October, when the national inflation rate rose to 0.1%. This change reflects a lowered base of comparison: the price of gasoline plummeted between September and October of last year.
The return of inflation should not be overstated. Today’s inflation rate is barely positive and falls short of the 0.3% that analysts had been forecasting.
The absolute level of consumer prices actually edged down between September and October of this year (but was higher on a seasonally-adjusted basis). Four provinces posted negative inflation rates. The Bank of Canada’s core inflation rate, which excludes gasoline, remains below its 2% target.
In other words, Canada still has a low-inflation economy. The government and Bank of Canada still have ample room to pursue stimulative policies without stoking excessive inflation. Indeed, dismal Gross Domestic Product numbers warrant more significant fiscal and monetary expansion to spur growth.
While inflation remains a non-issue for macroeconomic policy, the return to positive inflation comes just as the past year’s labour-market carnage is exerting a measurable drag on wages. Given limited or no pay increases, even modest inflation may have a noticeably negative effect on the purchasing power of Canadian workers.
However, a hawkish policy on inflation would worsen this problem by also constraining output and jobs, thereby amplifying the downward pressure on wages. With production so far below capacity, more expansionary policy can increase employment and wages at a faster pace than inflation.
UPDATE (November 18): Quoted by Reuters
UPDATE (November 19): Quoted by The Toronto Star
- Inflation Collapse Confounds Monetary Hawks (May 17th, 2013)
- Polozogistics: Nine Thoughts About the Choice of the New Bank of Canada Governor (May 3rd, 2013)
- Margaret Thatcher’s Economic Legacy (April 16th, 2013)
- Mark Carney’s tenure and the state of monetary policy (November 27th, 2012)
- Prices Decline Yet Again (August 17th, 2012)