Canadian inflation falls to 0.5% in January compared to January 2012. Further evidence of slowdown ?

Posted on February 23, 2013 by haroldchorneyeconomist

The latest inflation data for Canada adds further evidence that the Canadian economy is slowing and perhaps even teetering on the edge of deflation.The trend in inflation has been persistently in a downward direction over the past year. Year to year inflation as measured by the cpi was 3.3 % in April 2011, 2.6 % in March 2012, 1.2% in November 2012, 0.8% in Dec.2012 and 0.5% in Janury 2013.
Indeed this trend is true for Japan, Europe and Canada which is all the more reason to avoid austerity policies like the plague at this time. Unfortunately due to domestic politics, the U.S. is now embroiled in a struggle to avoid the unnecessary and damaging cuts associated with sequestration, a foolish policy that both the Republicans and Democrats imposed upon themselves in the passions of the moment over the obsession with deficit cutting and “entitlements” that is, social democratic minimum programs that all capitalist societies sensibly have in place. Instead of waiting for the economy to properly recover and the unemployment rate to drop below 5 % and then assess the long term sustainability of their programs at low unemployment they blundered into this debate prematurely. Given the inflation data we are seeing and the continued high unemployment these are clearly inappropriate and untimely obsessions.

About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.

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1 Response to Canadian inflation falls to 0.5% in January compared to January 2012. Further evidence of slowdown ?

Andrew Baldwin says:

February 23, 2013 at 11:44 pm

The most important thing about this CPI release is what it doesn’t announce. It should have announced that the CPI was moving to a 2011 basket with a December 2012 link month. Instead that basket update is being delayed to the next month. This means that Canada will remain the G-8 country with the worst timeliness of basket updates (an update with the January release would have made us average), and we will again not have a December link month, which had been standard for the Canadian CPI for the basket updates from the January 1978 update through the January 2003 update, covering a quarter of a century.
It should have been the objective of StatCan to return to a December link month after departing from it with the 2005 basket update, which had a four-month deterioration in timeliness and an April 2007 link month. Given six years to work on it, and about double the manpower and budget that the consumer prices sector had to work with in 2003, it should have been easy to accomplish, but StatCan still fell short by a month. The reason for this is that senior management started with vague ideas about increasing the frequency of basket updates, even vaguer ideas about increasing their timeliness, and no ideas at all about the most appropriate link month.
Shame on them, because arguments against a January link month and for a December link month are not hard to find. A paper by David Fenwick for the 1999 meeting of the Ottawa Group in Reykjavik, Iceland, “The impact of choice of link month and other factors on the relative performance of different formulae used for aggregating Consumer Price Index data at an elementary aggregate level” showed that in the UK post-Christmas sales gave January much the lowest seasonal factors of any month of the year for such important categories as clothing and furniture. The formula effect for the UK RPI as compared to the UK HICP, that is, the difference between the two main British consumer price series due to different elementary aggregation formulas being used in them, is substantially larger because Britain is the only major country to use a January rather than a December link month in chaining its consumer price series. Fenwick notes in particular that for the.
ratio-of-averages formula: “if one of the base period prices is abnormally low, such as during a sale … an item of much higher than average price can dominate the index.”.
Other disadvantages of a January link month are not hard to find. The 12-month percentage change for December is the most commonly used measure of annual price change. Only with December links is this a measure of pure price change. Using another month as the link month can lead to those bizarre situations that inevitably arrive with chain computations, such as the All-items series showing a higher (or lower) rate of increase than any of its sub-aggregates.
With December links and annual basket updates, the annual inflation rate based on annual averages will inevitably be distorted by basket shifts. However, one will still be able to calculate component contributions to percent change for these annual movements using an extension of the ONS method. With links based on any other month, this is no longer possible (or at least no-one has shown otherwise). One is forced to resort to calculating contributions to change based on unlinked series.
Of course, by choosing to link at December to allow contributions to change to be calculated for annual averages to be calculated based on the calendar year, one automatically sacrifices the ability to calculate them based on some other fiscal year. The problem is: with regular January links one is accommodating a February to January fiscal year, not a common choice at all. From this perspective, it would have been better to link at March, since April to March represents the Government of Canada fiscal year.
All of the G-8 countries without exception, except for Canada, use December links for their CPIs or their HICPs or both. Even the United Kingdom, which has January links for its RPI, has both December and January links for its CPI. This shows how other national statistical institutes recognize the advantages of December links, but it also provides an additional advantage, international comparability, in having them.
With the January 2014 update of the CPI next year, StatCan should announce that the CPI basket is being updated to 2012, with a December.
2013 link month.

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