And now, a word from our Parliamentary Budget Office - Macleans.ca
 

And now, a word from our Parliamentary Budget Office


 

Just in time for the holidays, a shiny new briefing note on . . . “revisiting the spectre of deflation”? That doesn’t sound very cheerful at all. Unfortunately, it’s also recommended reading, particularly if you, like ITQ, have a mind that is somewhat less than a steel trap when it comes to economics.

The short version:

Internationally, there has been much recent concern about the possibility of a deflationary episode, particularly for the beleaguered U.S. economy where consumer prices have fallen at a record pace in recent months. Indeed, the Federal Reserve has acknowledged the small, but growing deflation risk in the U.S. and has re-affirmed that it will take the necessary actions to avoid deflation.

For Canada, a small minority of private-sector forecasters now expect a shortperiod of negative numbers for total CPI in the near-term (on a year-over-year basis). However, at the current time, the possibility of persistent outright deflation in Canada remains low. According to the PBO’s private sector survey, as of December 12, 2008, the average forecast for total CPI inflation in Canada was 1.3% for 2009 and 1.6% for 2010. Both of these annual average forecasts are within the Bank of Canada’s 1%-3% inflation target band. Furthermore, despite a recent substantial monthly price decline in total CPI, core inflation — the preferred measure of inflation’s underlying trend — has not yet recorded a drop to more worrying levels.

At the same time, the lowest CPI forecast reported in the PBO’s survey calls for inflation of 0.8% and 0.6% in 2009 and 2010 respectively. This is not an expectation of outright price declines in Canada over a sustained period, but does indicate very weak price pressures overall going forward. Overall, at the current time, taking account of the CPI measurement problems discussed above, these forecasts point to a small possibility of a quite modest deflationary experience for Canadian households during the on-going economic slowdown.

Finally, an international historical perspective offers two additional points for consideration — points which are not intended to dismiss or discredit the current deflation concerns, but rather to offer a broader context for on-going discussions. First, mild, short-lived deflationary episodes are more common than most people think; and second, with the notable exception of the Great Depression, the economic record during these past deflationary episodes is not as bad as most people fear.

The even shorter version: No need to panic just yet, but keep an eye on the CPI.

PS Confidential to the parl.gc.ca webadmin: An RSS feed for this page would be awesome.


 

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