The inflation rate in Canada has finally risen to meet the target the central bank has for it. It's risen up to 2% for the first time in a couple of years. For those of us who are a little older this is of course something of a puzzler: how on earth can anyone be worrying about how low an inflation rate is? The historical task has always been to try and keep it down to the target, not try and get it to rise to it.
But that just shows us how different are these economic times. It has indeed been historically true, at least since WWII, that inflation has been the great beast that must be slayed. But in the aftermath of that Great Recession the worry has been about deflation, a much nastier disease than inflation, and thus the worry about inflation running under target rather than over it.
And further, we would probably like to have a little bit of inflation in the economy. a zero percent rate, well, it's not just too close to deflation, it also takes away one of the things that greases and oils the changes in the economy.
Canada’s inflation rate quickened in April to reach the central bank’s target for the first time in two years, led by higher energy costs that Governor Stephen Poloz says he will disregard. The consumer price index rose 2 percent in April from a year ago following March’s 1.5 percent pace, as energy prices jumped 8.4 percent, Statistics Canada said today from Ottawa. The core rate, which excludes eight volatile products, climbed 1.4 percent after a prior gain of 1.3 percent. Both increases matched the median forecasts in Bloomberg News surveys.
The reason we'd like to have a little inflation but not too much is that there are always things that are changing in the economy. And we'd like a little oil to help those changes go down. The most famous example is probably John Maynard Keynes' point about wages. People object, violently, to being told that they're going to have to take a pay cut. However, they're much less upset about getting no pay rise, and even less about getting one that doesn't keep up with inflation.
And in any economy there's always people whose wages should be falling in real terms: those in the industries that are one their way out. Having a little bit of inflation means that their wages can fall relative to others (so as to encourage them to move to other industries) without our having any of that violence.
Thus the joy that the Canadian inflation rate is now moving up to the target. It's still a bit of a shock for someone used to the concerns over inflation of the 70s and 80s, but once explained it's all OK again.