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Soft CPI data silence roars of the inflationistas

An Atwater Market bakery in Montreal. The rise in food prices abated as 2011 came to an end.

Christinne Muschi/The Globe and Mail/Christinne Muschi/The Globe and Mail

The year 2011 was marked by loud shouting on the part of inflationistas over how loose monetary policy was destined to stoke a spike in prices. That shouting should continue this year because that destiny has yet to arrive.

Canadian headline inflation plunged in December, to an annual rate of 2.3 per cent in December from 2.9 per cent in November. The drop was the result of significantly lower prices for gasoline and automobiles, Statistics Canada said in its monthly report Friday. The acceleration in the price of food also slowed at the end of 2011, to an annual increase of 4.4 per cent from 4.8 per cent in November.

Inflation pressures also eased at the year in the United States, the Labor Department said Thursday. Combined, the reports are vindication for the Bank of Canada and the Federal Reserve. As consumer prices rose through the middle of 2011, central bankers said the increase would be transitory, as it was rooted in a temporary jump in commodity prices. Things could change, but the initial data argues in the central banks' favour.

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Central bankers are confident that inflation will remain muted because there isn't enough consumer demand to bid prices higher. Producers and retailers might like to charge more for their products to absorb higher input costs, and some have marked up prices. But there's a limit to that in an economy marked by elevated unemployment and stagnant wages.

In Canada, the price of passenger vehicles dropped 0.2 per cent in December on an annual basis after jumping 1.8 per cent the month before. Clothing costs plunged 4.3 per cent, reflecting holiday discounting that was steeper than typical.

Declines of this magnitude might cause worry of deflation at first glance. Adjusted for seasonal factors, the plunge is less severe. Seasonally adjusted, the drop in clothing was 0.1 per cent. The headline consumer price index dropped 0.2 per cent on a seasonally adjusted basis.

However, the overarching storyline remains the same: the only pressure on the Fed and the Bank of Canada is coming from the hecklers in the audience. Perhaps someday the inflationistas will be proven correct, but for now, the data just isn't on their side.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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