A Hopeful Sign, But Not Cause for Complacency

The increase in consumer prices between January and February suggests that the threat of deflation may be less imminent than it appeared during the previous five months of falling prices. Whereas three provinces actually posted negative inflation rates in January, all posted positive inflation rates in February.

Today’s Bloomberg report begins by noting that this data “may ease pressure on the Bank of Canada to take additional measures to stem the recession.” If central bankers were to interpret today’s inflation numbers as a call to inaction, that would be a misinterpretation.

The risk of deflation has not disappeared. One month does not make a trend, especially since February’s up-tick was driven by volatile items such as gasoline, food and mortgage-interest costs. The Bank of Canada’s core inflation rate (which excludes these items) did not increase at all, remaining below the 2% target.

In formulating monetary policy, today’s better-than-expected inflation report must be weighed against worse-than-expected reports on output and employment. Even if the prospect of deflation has diminished, the Canadian economy still needs all possible stimulus to restore growth and create jobs. The Bank of Canada was right to raise the possibility of “credit and quantitative easing” and should also consider targeting a 0% interest rate.

UPDATE (March 20): Quoted by Canadian Press


  • Why are lower prices for everyday items a threat? The argument that it will cause people to stop buying buying food, shelter, transportation, housing and even entertainment does not seem viable. The evidence is in such items as computers, Internet service, electronics. The prices of these items, for both business and households, have been deflating for years, but these industries are not about to go broke.

    And, to repeat myself, I am not about to stop buying clothes or food when the prices go down.

  • Did we ever think we would see the day when the Globe ran a headline (online anyway), “Surprise inflation offers hope”. Oh, how times have changed.

  • Dear Alan,

    Deflation such as that which is and will eventually be felt with this crisis is a lot different from the market pressures on computers and electronics.

    The deflation to worry about is the one that spirals uncontrollably, that is consumption drops due to wages cuts and layoffs, which leads companies forced to cut prices to make sales which leads to more layoffs and wage cuts, which leads to even lower consumption and more wages cuts which can easily, (as history has proven, lead to some massive destruction of life, productive assets and the like. For example, did you know that in the 30’s massive amounts of wheat were left to rot in the grain elevators as the price of wheat deflated to a point that it was no longer profitable in a market based rationality, to take the wheat out and try to sell it. In many cases wheat was burned to try and shrink the supply and prop up prices.

    That is blatantly evil and out of control badness. The worst thing about it is it is very difficult to contain once it starts and reaches some critical threshold, noit sure of the research on this slide into the abyss type numbers, and it would be interesting reading the statistics on such a phenomenon .

    Let me underline something here, we have no room during these times to have inaccurate estimates or errors on the CPI numbers.

    Lower prices in a controlled fashion on the basis of productivity improvements and other such positive instruments of economic change are what we all strive for under this technical rationality that we have been living under for the past 300-400 years. But these are hard fought gains that are supposedly socially and now environmentally friendly.

    So progress defined on such terms, sometimes do lead to lower prices, but that is not the kind of deflationary pressures that has reared its ugly head under this latest collapse of capitalism.

    This hyda must be slain with a mighty blow before these small attacks just lead to more heads growing. For example, we now seem to be entering the phase where public sector cuts seem to irrationally made their appearance on the radar screens of all these micro managers. the grand macro managers, like premiers and the prime minister must somehow turn these micro managers into macro managers or we will see the hydra take flight for sure.

    Hope that helps


  • Paul, thank you for the reply. Is that not why we now have things such as unemployment insurance? I have heard UI described as an automatic stabilizer, which I understand to mean we don’t need to print money to fight the hydra of runaway deflation, because with automatic stabilizers in place, deflation cannot get out of control. If the automatic stabilizers are too weak, and we are printing money anyway, we should be writing cheques to the unemployed rather then buying bonds.

    Which brings me to my next thought. If deflation is caused by too much unemployment, a good solution is direct employment rather then increasing the money supply in the hope that some of will be invested in a way that increases employment.

    Does unemployment cause runaway deflation? Then fix unemployment.

  • While I believe it is prudent for the BofC to develop a QE plan-implemetation should be held off. The recent data indicates it is not required to mitigate deflation or liquidity-and the deflation threat does not supersede the long-term inflationary risk.

  • A question about quantitative easing. Has that already been done via the chartered banks auctioning off mortgages to CMHC?

  • Is the inflation caused by demand or by the debt costs of the providers? Stagflation is prices rising while wages decline. Stagflation is due to the trend toward monopoly (which has gone hog wild the last couple decades) and the debts costs from all the borrowing to buy up competitors.

    Every bust cycle the large corporations that have the best banking buddies take advantage of the bust the bankers create and buy up the competitors that the banks don’t favour.

    What were the sales figures during this period and does the increase in demand (if any) correspond to the items that rose in price?

  • “Why are lower prices for everyday items a threat?”

    Its not the lower prices its the decline in wages (or in our modern case, job loss and decline in borrowing.) that force producers to lower prices. Of course, the money powers can’t refer directly to a decline in wages – the complacent majority might start actually thinking about what is going on.

    If we do pull out of this one is highly unlikely we’ll pull out of the next. We just can’t borrow enough.

  • Pat, I can understand concerns about job loss, but decline in borrowing? What is a viable long term borrowing rate for a population? Surely that rate cannot grow indefinitely? Right now, in Canada, we are a personal debt rate of what? 130% of income? Is that not too high?

  • Alan, on previous point you are right. Unemployment Insurance would help against deflationary forces. That is one of the more dramatic lessons we once had learned about the great crash. A safety net is needed to help out at the both the personal level and also the macro level to stablilze demand when deflationary forces strike up.

    The unfortunate part that you forget to factor into you question on EI and for that matter many other stabilizers is we have just went through 30 years of unlearning these lessons by letting the conservative forces within our nation dismantle these progressive safeguards.

    To Darcy, the inflationary threat is a load of double talking backwards ideological crap. (and that is putting it mildly). What data?

    The inflationary threat has been so beaten and dead for the last 8 years. I have started picking up in this ideological stance recently in the press and have to say that it is such nonsense.

    I mean really, with the layoffs and the hits to employment the only threat that could remotely be imagined for inflation is the complete collapse of our dollar. Now given that the American dollar is much like the Gold standard of the 30’s and contrary to that time I do not see our “Gold Standard” busting. The US dollar is the international peg for value, and it will remain so. That is one of the more optimistic notions about this period compared to the 30’s. We have a lot more relative stability and coordination in the international monetary circles.

    So any speak of inflationary pressures is pretty much treason, at least from a solving this crisis perspective. I wish you inflation hawks would would take some anti-anxiety meds and learn to accept that inflation as a threat is dead. The threat right now is deflation. Talk such as yours only gives more fuel to deflation as it leaves our policy makers focusing in the wrong direction and damn, it already take policy shops forever and a day to act.

    Accelerating unemployment like we have with nothing on the horizon that even remotely looks like a blip of growth, is about as close to annilation as inflation will ever come to.

    Stagflation is a whole different kettle of fish.


  • It seems that the increase in CPI is being driven by high food and shelter prices. Food prices are rising due to forces unrelated to “the strength of our economy” – Stats Can sites droughts in California and the depreciating Canadian dollar as the big drivers. Shelter prices are rising because the way they calculate them goes quite far in the past so it will take a while before the decline in housing prices and the low mortgage interest rates make their way into that indicator.

    How does this translate into “hope” for the strength of our economy? I don’t see any indication that consumer spending is rebounding (outside of essentials like food purchased from stores) or that businesses are starting to make investments, which is what we need for the economy to get back on track (government spending aside).

  • Alan,

    Thats exactly the problem – our money is all debt. If we don’t keep borrowing faster and faster we go into recession or depression. the Euphemism “Economic Growth” is a handy code-word for debt-growth. If we don’t have around 3% growth of debt per year the system starts to implode.

  • “Is the inflation caused by demand or by the debt costs of the providers?”

    Looks like my question was answered in “Statscan Spins the Recession”. Prices went up, demand didn’t.

Leave a Reply

Your email address will not be published. Required fields are marked *