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.