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The Progressive Economics Forum

Prices Decline Yet Again

Statistics Canada reported today that, for a third consecutive month, consumer prices declined and the inflation rate fell below 2%. In July, the inflation rate was 1.3% and the Bank of Canada’s core rate was 1.7%.

Gasoline and natural gas prices, which have been lower this summer than last, dragged down the overall Consumer Price Index. However, there is little indication of inflationary pressure anywhere.

Even those categories with the largest price increases were in line with the Bank of Canada’s 2% target. Food prices and household expenses rose 2.1% over the past year. The inflation rate for services was 2%.

With inflation subdued, there is no pressure for the central bank to raise interest rates. Indeed, the Bank of Canada could intervene to bring the overvalued exchange rate down to more competitive levels
without stoking significant inflation.

Low interest rates and low inflation create an ideal environment for public investment. Governments can finance long-term infrastructure spending very cheaply. Such investment would contribute to economic growth and employment without imposing discernable cost pressure on the wider economy.

UPDATE (August 18): Quoted in today’s Toronto Star (page B5), Montreal Gazette (page C3), Waterloo Region Record (page D2), Victoria Times Colonist (page B5), Regina Leader-Post (page B1), Guelph Mercury (page B7), Cape Breton Post (page A9) and Truro Daily News (page A7).

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Comments

Comment from Angella MacEwen
Time: August 17, 2012, 12:06 pm

Public infrastructure spending that pays for itself in the medium term & improves private sector productivity? Affordable, accessible, quality childcare. Let’s do that.

Comment from Larry Kazdan
Time: August 17, 2012, 1:04 pm

Modern Monetary Theory – Bill Mitchell

“government spending is independent of borrowing, with the latter best thought of as coming after spending”

http://modernmoney.wordpress.com/tag/deficit-spending-101/

Comment from Thomas Bergbusch
Time: August 17, 2012, 10:07 pm

@Larry Kazdan:

Good point, but Erin wrote “Governments (plural) can finance long-term infrastructure spending very cheaply.” Clearly he talking about provincial, territorial and municipal governments as well, not just the currency issuer.

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