1H2007 CPI inflation

Further to Erin’s post on the odd fluctuations in the monthly inflation rate, a better approach is to look at year-to-date averages in order to smooth out these monthly fluctuations. For the first six months of 2007, the average CPI was 111.05, and for the first six months of 2006, 108.87.

This works out to an first-half of 2007 inflation rate of exactly 2.00% – in other words, precisely in the middle of the Bank of Canada’s inflation target range of 1-3%. And the 2006 full year inflation rate: also 2.0%.

So one wonders, why are we so concerned about inflation and the horror of an inflationary spiral?

5 comments

  • There’s more to inflation than simple goods price inflation. Have you seen what asset prices are doing? Check out the stock market, housing prices, and art prices. It’s there that you’ll find your inflation.

  • It’s called the consumer price index. Inflation of consumer goods and services. Investments are not included in the CPI because they aren’t consumed. There are all kinds of measures of different kinds of inflation. No one measure suits every need. There are many indicators of price change for everything you have listed.

    BTW it seems kind of arbitrary to just pick a few months and compare it to the same period a year earlier. I don’t think my Mom would want her pension adjusted that way.

  • JP, I think you are right that asset price inflation is a real issue that is absent from the Bank of Canada’s thinking on interest rates and inflation. How to deal with it is a different issue: in the case of stocks, increasing margin requirements was suggested as an alternative policy back during the tech boom. For housing, there may some justification for preventing the type of overly permissive lending we saw in the US recently (though that does not appear to have happened, at least not to anywhere near the same degree, in Canada).

    But generally speaking, I am in favour of keeping interest rates as low as possible, which as Keynes noted, is stimulative to the economy, and “euthanizes the rentier (banker) class”. They are a blunt, if potent, instrument of macro policy. I do not believe that the Bank has made a persuasive case to raise them at this point in time.

    Ron, I don’t think it is arbitrary at all to use year-to-date averages to assess where we are right now. The year-end number is just a year-to-date average of the past twelve months; so with six months of data, a YTD average is a better measure of 2007 inflation (it being July) than month-over-same month-a-year-ago. My point was that on this basis of the YTD average, inflation has not changed at all from the 2.0% in 2006, and this is right in the middle of the Bank’s target range, so they should not be concerned about inflation being a macro problem. And this is supported by the data that real wage gains have been quite weak in recent years.

  • But to answer your question directly; it is because the BOC is running macroeconmic adjustment on the backs of workers not owners. Sorry but it really is that simple. I wish it were otherwise.

  • What about using statutory reserves rather than the interest rates? I’ve heard it described as a “soft tool or faucet” rather than the blunt force to the economy of raising interest rates.

    It would require an amendment to the Bank of Canada Act though, because statutory reserves were repealed in 1991…around when the Bank of Canada decided that its only mandate was fighting inflation.

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