The recent upward drift in the consumer price index, which the Bank of Canada watches like a hawk, appeared to put to rest concerns that the country was headed for disinflation, a period of low and declining inflation.
But it appears the relief may have been premature.
This Friday's inflation reading for February is likely to again grab central banker Stephen Poloz's full attention, with some economists predicting the Statistics Canada report will show the annual CPI falling below one per cent, and even as low as 0.5%, from January's comfortable 1.5% setting.
That will put inflation, or lack of it, back on the central bank's radar in time for next month's quarterly monetary policy report and possibly elicit more fretting from Poloz that the lack of price pressure suggests the economy's output gap continues to grow, or at least is not closing as fast as it should.
The central bank had been breathing easier of late after the economy's healthy 2.7 and 2.9% jumps in output in the final two quarters of 2013.
But early indicators are that growth has fallen back again — partly due to an unusually bitter winter — but also because the global picture continues to disappoint. CIBC recently downgraded its estimate of growth for 2014 to 2.1%, four-10ths of a point behind the bank's.
The reason this is important is that the longer the bank feels it will take to return inflation to 2%, the longer it is likely to keep interest rates low to push the economy in that direction. That's good news for borrowers, such as those wishing to buy a home, but its not so good for the economy generally
The classic example in the modern era of deflation damaging the economy is Japan in the 1990s, where actual average price drops had the unwanted effect of convincing consumers to hold off buying decisions in order to take advantage of lower prices down the road, triggering a reinforcing cycle of lower economic activity and still lower inflation.
Canada is nowhere near that point, economists note. Canada's low inflation record of the past two years is almost certainly a symptom, rather than a cause, of both a weak domestic and external economy.
Inflation jumped through the roof February 2013, meaning Friday's reading will be based on that inflated base effect. On a month-to-month basis, it is known that gasoline prices rose as have utility costs.
Another reason to take a more benign view of inflation is that the Canadian dollar has lost about 10% value over the last several months — with some lag, that depreciation should pump up import prices and heat up inflation across the economy.
