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A person walks past the Bank of Canada building, in Ottawa, in an undated file photo.GEOFF ROBINS/AFP/Getty Images

Should we still be worried about low inflation? It kind of depends on what you mean by “worry.”

Wednesday’s report from Statistics Canada on the consumer price index, or CPI, for September shows that the year-over-year inflation rate picked itself up off the pandemic mat, rising to 0.5 per cent, after two consecutive months at a precariously thin 0.1 per cent. The upturn was bigger than most economists had anticipated, and likely prompted some sighs of relief at the Bank of Canada, whose monetary policy is intrinsically tied to achieving a healthy inflation rate.

Any movement away from zero, and toward the central bank’s target range of 1 to 3 per cent, removes heat on the bank to add to the substantial monetary stimulus it already has in place, in the form of near-zero interest rates and its $5-billion-a-week purchases of government bonds. The central bank’s three measures for core inflation – designed to filter out temporary distortions (of which there are plenty in this crisis) – had an average reading of 1.7 per cent, which, all things considered, is not massively short of the bank’s central inflation target of 2 per cent.

Still, the inflation rate looks a lot like most of Canada’s economic indicators – improved by the reopening of much of the economy following the spring’s coronavirus-containment lockdowns, yet still a far cry from what anyone would call normal. The lack of inflation is a direct reflection of an economy that still has a virus standing between it and any true normal.

For example, consider that a significant factor in September’s stronger inflation number was actually a decline in air travel costs. Prices for airline tickets generally go down a lot in September, as the peak summer travel season ends. This year, there effectively was no summer travel season, and tickets were already deeply discounted in August from their normal summer rates. So, they only dipped a little more in September, instead of a lot. The net result was a smaller downward contribution to overall inflation. But this could hardly be viewed as a positive; it’s more an illustration of just how weird things still are.

Frankly, the year-over-year inflation rate isn’t a figure that has a lot of meaning, because it’s made up of two very different realities: five months before the pandemic, and the past seven months in the pandemic, which has radically altered consumption patterns. It’s not even comparing apples to oranges; it’s mashing an apple and an orange together, and then trying to determine how good that applange tastes.

Maybe we’d get a more useful sense of the current inflation trend by at least narrowing our view to the past three months – the period that more or less represents a reopened economy living within the constraints of the pandemic.

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In that time, CPI is actually down 0.2 per cent. If you look at figures that have been adjusted to account for typical seasonal effects, the picture is better – up 0.15 per cent – but as we just discussed, normal seasonal patterns don’t necessarily apply, so seasonally adjusted data might not tell an accurate story at the moment. The average of the Bank of Canada’s core inflation gauges has inched up just 0.07 of a percentage point (from 1.67 per cent to 1.73 per cent) in that time.

The point is that inflationary momentum, while not zero, is still very weak. That’s no surprise. Consider the factors that typically fuel true, sustainable inflation: capacity pressures and labour shortages.

Gross domestic product figures tell us that by August, the economy’s output of goods and services was about 5-per-cent below its prepandemic levels. Manufacturing sales were nearly 7-per-cent short of prepandemic levels, as were goods exports. Employment in September was down 3.7 per cent from February. Those figures illustrate a lot of spare capacity and labour to meet existing demand – and that typically translates into tepid inflation.

Merely from an arithmetic standpoint, we can expect to see the inflation numbers rise in the coming months, as more and more of the pre-COVID-19 landscape drops out of the year-over-year comparison. By early March, for example, the plunge in gasoline prices associated with the pandemic – which has been a huge contributor to the weakness in inflation numbers for months now – will disappear from the annual inflation equation, and fuel prices will suddenly become a major positive contributor to the inflation figures.

But until the economy can close the capacity and labour gap that the pandemic has opened, underlying inflation isn’t going to return to full health, either. And until COVID-19 is vanquished, the restrictions the pandemic continues to impose on the economy will keep those gaps open.

With a second wave of the virus upon us, those restrictions will impose a severe speed limit on inflation, and on the economy more broadly. The best prescription is ultimately the same as it is for the pandemic itself: a vaccine.

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