Canada’s inflation rate swung back into positive territory in June, with consumer prices rising at a 0.7 per cent annual pace.
In May, during the depths of COVID-19 lockdowns, Canada’s inflation rate dipped to -0.4 per cent, the second straight month below zero. If inflation below zero persists, that’s a very worrisome economic trend known as deflation, but June’s figures suggest that it may have been a temporary blip.
On a monthly, seasonally adjusted basis, the inflation rate rose by a full per cent in June alone. That’s the largest monthly rise on that metric since the GST began in 1991, Bank of Montreal economist Doug Porter noted, and it’s mainly because of big bounceback in prices for things like books, gasoline and electricity, which saw huge price plunges in the earliest days of the pandemic.
The 0.7 per cent annual figure was twice as good as the 0.3 per cent rebound that economists had been expecting, and while that’s encouraging to see, Porter says the strong number shows just how far the economy has yet to come to fully recover.
“While this is a big shift from two months of headline deflation, it’s still below the bottom end of the [Bank of Canada]’s comfort range for inflation,” which is between one and three per cent, he said.
Why is deflation bad?
While prices getting lower and lower sounds great on the surface for consumers, it is a bad feedback loop for an economy because it tends to bring spending to a grinding halt.
If prices for goods keep getting cheaper, consumers tend to put off purchases, knowing they can be made later for less. But if people stop spending money en masse, that means companies have no money for hiring and raises. Layoffs and salary freezes ensue. If deflation sticks around for long enough, the economy starts to contract, and it’s hard to break out of that vicious cycle.
Economist James Marple at TD Bank was cautious about June’s rebound, saying “deflation is not an immediate risk to the Canadian economy, but the road ahead will be long and challenges to maintaining economic momentum will come.”
“Risks of health and economic setbacks will continue until a vaccine is widely available.”