Canadian Monetary Orthodoxy in Motion

Today’s report of a drop in the Canadian rate of inflation to a 1.4% increase in the consumer price index (CPI) has sparked predictions of a 0.50 point cut in the Bank of Canada’s discount rate next week. It’s nice to see events confirm one’s forecast, as set out in Nov. 2, Sept. 19, and other blog posts. That doesn’t always happen.

But should central banks cut interest rates just because the CPI is approaching the lower boundary of their prescribed inflation target? Perhaps, as argued in my Ensuring Financial Stability column, the inflation target ought to also acknowledge inflation in asset prices.

Right now, commodity and agricultural prices are soaring to new highs. And the Federal Reserve is pulling out the stops to stimulate the U.S. economy. That’s beginning to look like a recipe for a return to the macroeconomic instability of previous eras.

Besides, what’s wrong with a little bit of price deflation? The March slowdown in Canadian inflation was mostly attributable to a drop in prices for cars (-7%), fresh vegetables (-18%) and fresh fruit (-11%), which more than offset increases in the cost of gasoline (+8%) and mortgage interest (+8%).

It’s really nice being able to buy cars and fresh food cheaper. It would be even nicer if other items cost less too. The paycheck would certainly go a lot further. One’s standard of living would be higher.