Deflation Deepens

In July, the Consumer Price Index posted an annual decline of 0.9%, the most negative inflation rate since July of 1953. This decline is troubling not only because it is larger than last month’s decline, but also because it is more widespread.

Recent decreases in inflation have mainly been driven by lower gasoline prices in 2009 compared to 2008. This fact has tempered concerns about a generalized decline in prices prompting consumers to delay purchases in anticipation of even lower prices and businesses cutting back output in response to this reduction in consumer demand.

While such a deflationary spiral is still unlikely, today’s numbers confirm that deflation remains a more serious threat than rising inflation. Price declines were more widespread in July than in previous months. Month-over-month, four of eight Consumer Price Index components were in negative territory.

A similar broadening occurred geographically. Whereas June’s price-level decline had been concentrated in four provinces, eight provinces posted negative inflation in July. In particular, the two largest provinces (Ontario and Quebec) dropped into deflation.

The solution to deflation is, of course, stimulative monetary and fiscal policies. Even if such policies are not needed to end deflation, the fact that inflation is negative leaves ample room to pursue them without risking excessive inflation.

For example, if stimulus policies were to produce a 4% jump in inflation relative to today, Canada’s inflation rate would still only be 3%. While at the upper end of the Bank of Canada’s target range, such inflation would hardly be catastrophic. Indeed, policymakers should be quite willing to incur such an inflation rate in the process of restoring growth in output and employment.

For more on the policy implications of negative inflation, please see last month’s Consumer Price Index commentary.

UPDATE (August 20): Quoted by The Toronto Star

3 comments

  • okay so here goes my deflation hawk perspective-

    56 years is a long time, and it is not the first time we have had oil price fluctuations. Why take out the fuel prices anyway, is that not part of effective demand shrinking?. Or is this now just finally accepting that a lot of the oil price behaviour is merely speculative behaviour based on some notion of demand and profit taking?

    Anyway, we still are within some zombie like space with prices- is the fear of deflation spirals alive or are we all quite comfortable knowing that it is dead but merely just walking around flailing its scary arms.

    We have a bit of slowing in employment decline south of the border, but we here in the north still seem to be in free fall- but with a belief that the net below us as hole filled as it is, will hold. Assuming the tories don’t dont punch a few more holes in it that is.

    Anybody here getting this feeling that, potentially the L shape that was mentioned on this blog some months ago, is more of a reality than a U or a V.

    At least an elongated L. There really is not a lot of positive anywhere and if anything, the more bad economic news pile is much higher than the good.

    As Erin points out, if anything we could at least hope this will keep the Inflation hawks at the bank of Canada in their cages, and safely away from the public. A central Bank is such a terrible thing to waste!

    back to the hammock.

  • Using the most recent Consumer Price Index data, the CoinNews Inflation Calculator shows how consumer prices have changed over the years. By entering any two dates from 1913-2009 and then a dollar amount, the calculator measures the buying power of the dollar over time. Inflation over the years can be seen with these few calculator examples:An item purchased in 1913 for $1 would now cost $21.75 An item purchased in 1950 for $10 would now cost $89.36 An item purchased for $20 in 1985 would now cost $40.03

    Mixed dates may also be used with the Inflation Calculator. As examples:An item purchased today for $500 would have cost $124.91 in 1975 An item purchased for $1000 in 1980 would have cost $1,586.17 in 1990

    Of course, not all “goods and services” rise or fall in tandem with inflation rates. For example, many computers when adjusted for inflation are actually less expensive today (and do more) compared to years ago. Technology is Capitalism success as its the least governmently intervened or subsidized.

  • My figures were based off the USD. I disagree that Inflation is mute, being neighbor to a very large economy and inflated currency, can spill over to Canada in other ways. I however agree with your assessment of Canada will have deflation due to for most of 2009 plus 16 other basket of major currencies have experienced quite the run up against the USD, the Cad has inched higher citing parity giving us quite the new purchasing power. But is still relatively cheap or the same for Europeans and Asians to buy Canadian, it however is not for Americans Where Inflation is alive.

    Long term decline in the Cad was broke this last decade where the Canadian Dollar year over year has stopped its decline unlike the US over the last decade which accelerated to the point of parity between our currencies. This why Elderly Canadians and American reminisces about 5 cent a snow cone, 25cents a gallon etc. There is evidence to back a stronger Canadian dollar, which will cause a lowering of prices in Canada and deflation.

    There will be a recovery, prices will go up, interest rates should go up to maintain price stability, Canada will have higher interest rate eventually, with Isreal being the First developed nation to raise their Interest. Canada will do it and it wont even hurt much given if our economy also does not get hooked on debt. When we looked at America 2001 When Bush and Greenspan Slashed interest rate to combat the NAsdaq bubble, they created the housing bubble and didn’t raise interest rates, Bush racked up deficits and a two costly War deficits. prices skyrocket and there was No Paul Volcker at The FED to take the Punch Bowl away from Bush by setting a 10% interest or 5% interest rate after November 1st 2001 when the recovery began, bush/ FED Greenspan kept rates exceptionally low into 2006.

    The truth is Obama in this crisis has 0% interest rates and on top of all Bush debt, sacked anther 13 trillion in various obligations while 1 trillion of that alone is added to their budget deficit which is project to be 9 trillion in 10 years, that’s almost a trillion a year, and their estimates are rosy at best, it will be mission impossible for the central bank of America to follow other countries like Canada and have a higher interest rate when there is a recovery

    That is why I am an Inflationist when I would traditionally would be in the deflationists camp. Prices will skyrocket in the US because the FED will be unable to drastically reign in this liquidity in a recovery due to inability to raise a meaningful interest rate and that will have a impact on Canada one way or another but we will come out it better and less dependent on the US.

    This is just one Candian point of view.

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