Monday, August 31, 2009

Is Deflation Good for Business?

Energy prices have truly influenced the global economy over the last couple of years. As gasoline prices have moved down in 2009, one result, in June 2009, was a negative annual inflation rate in Canada. This was the first time this has occurred since November 1994. Similarly, the country's Consumer Price Index (CPI) is expected to be down, marking a decline for the second consecutive year. Overall, though, core inflation is expected to remain fairly stable and close out the year at or near two per cent, as predicted by the Bank of Canada.

Analysts predict that this period of deflation is merely transitory and will likely be take in stride by markets. The Bank of Canada is expected to maintain its promise to keep interest rates at a floor of 0.25 per cent until next year, assuming that inflation remains stable.

As the deflation is attributed to the movement in gasoline prices, the effects are not considered to be ominous. The Bank of Canada had predicted that there would be a period of falling prices, but also predicted that the effects would taper off towards the end of the third quarter of 2009.

When the rather volatile gasoline prices are removed from the inflation index, the country's economic factors are fairly stable. During the recession, some economists described to the core inflation rate as "sticky." Despite the weakening of the economy, the Canadian dollar was fairly strong and food prices were slow to come down. Thus, the core inflation rate did not vary much. As food costs begin to drift down in the coming months, they are expected to bring down the core inflation rate.

Incorporate in Canada with
Click. You're incorporated ®