Deflation continues:Prices fall in August 0.8%

Sept.18, 2009

Despite all the clamour about the risk of inflation because of the stimulus and quantitative easing by central banks, last month's August inflation numbers released by Statistics Canada show that prices fell in August by 0.8 %.This was the second largest monthly   drop in consumer prices since 1953. Given capacity utilization rates and the deep recession we are emerging from the news ought to remind critics, who continue to carp about the risk of inflation that our current risk is deflation not inflation. Inflation will not be a factor for some months(perhaps years) to come as the recovery begins to take hold. So long as there is such high unemployment and low capacity utilization rate, inflation is extremely unlikely. A similar situation prevails in the U.S. where the data show that in August the CPI year to year   for all items for urban workers continues to be negative .The C.P.I   inflation   rate   in the U.S.in   August was -1.9 % less than it was 12 months earlier.In Japan prices continue to fall as they have for the past 6 months. The C.P.I. for August was minus 2.4 %.
Prime Minister Harper's comments to the U.S. Congressional leaders and journalists in which he stressed the importance of an exit strategy from deficit spending was therefore somewhat premature when clearly there are still powerful deflationary forces at work. No harm in doing advance planning but in the meantime efforts need still to be concentrated on the more immediate problem at hand-reversing the slump and lowering unemployment.We are not out of the deflationary woods quite yet.

In a related development the Québec government of Jean Charest has very wisely decided to ensure passage of legislation that permits the government to avoid cutbacks and run necessary deficits for the next several years to fight the recession and preserve services. Bill 40 suspends the balanced budget act until 2013/14. This budget year the deficit is expected to be 3.9 billion dollars.Most of this is due to the the rise in unemployment and the fall in business activity.

Since the Québec GDP as of Q1, 2009 was 298.9 billion dollars the deficit is only 1.3 % of the GDP. Québec's net debt stands at 127.5 billion or 42.6 % of the GDP.If necessary there is room for further expansion of the deficit to fight the recession and its aftermath.