Deflation Has Landed

Deflation is no longer a spectre, but a reality for Canada. This morning, Statistics Canada reported an inflation rate of minus 0.3%.

Inflation turning negative was widely predicted, including in my previous comments on the Consumer Price Index. Although not surprising, today’s news has important implications for the debate about further fiscal stimulus.

Statistics Canada noted that June 2009 was the first month of negative inflation since November 1994. The annual inflation rate was indeed negative for three months in 1994, but never fell below minus 0.2%.

Today’s inflation rate falls below the 1994 experience. In fact, it is the lowest Canadian inflation rate recorded since August 1955.

Despite being the most negative inflation rate in more than half a century, today’s figure does not reflect a deflationary spiral. We have not seen a generalized price decline prompting delayed consumer purchases and further production cuts. So far, inflation is negative almost entirely due to lower gasoline prices in the summer of 2009 compared to the summer of 2008.

Nevertheless, a negative inflation rate deflates the argument that central banks and governments should reign-in stimulus to avoid rising inflation. My last Consumer Price Index commentary observed that G-8 finance ministers were wildly premature in proposing “exist strategies” from stimulus programs. Thankfully, G-8 leaders have since committed to continue stimulus until it achieves a sustained economic recovery.

Negative inflation leaves room for further stimulus without much risk of fuelling excessive inflation. The Government of Canada should be formulating a second stimulus package because its first stimulus package was too small, a low debt-to-GDP ratio affords ample room to finance more stimulus, and more stimulus will be needed to create jobs even after economic growth resumes.

With a substantial trade deficit on top of ongoing corporate and household de-leveraging, Canada may be entering a period in which public investment will be the main driver of economic growth. In this sense, the focus should be not only on more short-term stimulus but also on more long-term public investment.

UPDATE (July 18): Today’s Toronto Star quotes this commentary. It and other newspapers have reported that June had the lowest inflation rate since 1955. That information was not in Statistics Canada’s release and I am inclined to claim that you read it here first. However, Statistics Canada’s historical inflation data is publicly accessible, so anyone else could have come up with this factoid independently.


  • And I hope Erin, adding on to your last line, we have governments responding in such a manner. Instead of cutting budgets and taking aim at public workers, we need to have a more macro response.

    To date, we have started to witness public sector wage concessions, i.e. Toronto, and some provincial cuts to budgets, i.e. Campbell’s BC Government.

    This will only add to the deflationary winds. I know I am a bit of a deflation hawk, but hey I am still not convinced that we have turned the corner. THe employment numbers in the US are still bleeding quite profusely- the patient still has not regained consciousness.

    Oddly enough!?, it seems when the bank investors ship is right sided and bailed out, it seems like happy times. Why is it that when it were the well to do, were in fear for dramatic losses, policy makers went wild, bring forth the most extravagant finacial aid packages, we have ever witnessed. Yet when it is workers continuing to lose thousands and thousands of jobs, there is no storm any more, no panic, no huge bail out packages, no government action.

    The contradictions are loud, but why does it not seem to translate to votes. I don;t get it! It was the working man’s tax dollars that saved the financial industry, hmmmmmm.


  • My understanding is that core inflation is basically unaffected and it’s oil prices, which we all know are extremely volatile, that are driving these inflation numbers.

    It seems a little premature to make any widesweeping claims about the effects of stimulus on deflation when we haven’t seen core deflation.

  • By the same token, as you point out there hasn’t been any impact from the stimulus on inflation either.
    I dunno. I’m not sure where they get all these numbers. From what my wife tells me it sure seems like it’s easier to bargain hunt for clothes and such lately.

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