Flirting with Deflation

This morning’s Consumer Price Index data reveals that the national inflation rate fell to 0.1% in May. Four provinces – Alberta, New Brunswick, Nova Scotia, and Prince Edward Island – posted negative inflation rates.

The supposed risk of continuing fiscal and monetary stimulus too long is that they could propel accelerating inflation. The Finance Minister and Bank of Canada Governor have recently begun proposing an “exit strategy” from stimulative policies. This weekend’s statement from G-8 Finance Ministers also called for “exit strategies.”

Today’s inflation numbers confirm that this talk is wildly premature, particularly as far as Canada is concerned. Our inflation rate will almost certainly turn negative before beginning to increase. Governments and the Bank of Canada have ample time to press ahead with stimulus policies before rising inflation becomes a meaningful concern.

Japan is the only advanced capitalist country that has much experience with “quantitative easing.” Recent Japanese history provides no evidence that this policy leads to excessive inflation.

The greater risk today remains deflation, a sustained decline in prices that could prompt consumers to delay purchases in anticipation of even lower prices. This reduction in consumer demand would prompt businesses to produce less and lay off more workers, which would further undermine demand and prices.

An important caveat is that Canada’s inflation rate will probably turn negative because gasoline prices are lower now than they were in 2008. The decline in gasoline prices is not synonymous with more generalized deflation. Nevertheless, the threat of deflation still outweighs the more remote possibility of accelerating inflation.

3 comments

  • The irony of the inflation hawks, is beyond irrationally defined expectations.

    The European financial system came out last week and made a huge statement regarding how American banks have been dragging their feet stalling on realizing the asset depreciation from the financial meltdown. The stress tests that were conducted have been noted as merely window dressing in the attempt to help prop up some flimsy notions that recovery is just a hop skip and gleeful jump away.

    Yet in this period of extreme irrationality, we have the inflation hawks hijacking the policy for recovery.

    The only inflationary pressures are from those that have jumped on the recovery band wagon before ithe wheels were even attached, that being the banks jacking rates, and the traders pricing oil into some quite inflationary space. And don;t tell me the prie of oil is reflecting any notion of increased economic activity, as that is quite an odd notion given the throngs of unemployed.

    We have stupidly been playing with fire and for some reason have told the fire fighters to go home as they are no longer needed.

    But as I stated, who knows how far the boundaries of credit capitalism can be stretched.

    It won;t be long and we’ll be right back to last winter and it will happen quickly. Another couple American banks will be in the ditch and another couple trillion will be spent bailing out the capitalists.

    The question is, when will the alternatives start making a greater presence within the popular discourse. There are some heady signs, damn I couldn’t;t believe the globe and mail on the weekend having a splashy article on Marxism and its offering of currency.

    Nothing like teh jarring pain of a kick in the teeth to make sense of things, but I feel we are just about to be kicked again. It most likely will take a few more before any real change occurs. Denial is such an efficient socially constructed defense mechanism.

    pt.

    about the only thing that is creating inflationary pressures are those who

  • I would go for quarterly half-point increases in the GST, and bring inflation up to about 2%. Bolster it with the occasional sin tax. Of course the hard part is convincing people that this would be temporary.

  • I strongly believe that upcoming inflation can be contained by instrumentalizing bank reserve ratios. I describe this in a blog post: http://adamman71.blogspot.com/2009/07/deflating-bubble-on-one-leg.html.

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