Canada's annual inflation rate dipped below zero for the first time in 15 years in June 2009.Total CPI inflation declined to -0.3 percent in June and should trough in the third quarter of this year before returning to the 2 percent target in the second quarter of 2011 as aggregate supply and demand return to balance. Core inflation held up at 1.9 percent in the second quarter of 2009. The Bank still expects core inflation to diminish in the second half of this year before gradually returning to 2 percent in the second quarter of 2011Policy makers worry about deflation because it tends to influence consumers and businesses into postponing purchases in expectation of future lower prices, thereby further weakening an already struggling economy.Economists have stressed that Canada does not have a deflation problem – a broad and prolonged period of falling prices – and that the dip into negative territory will be short-lived.
Minus gasoline, the cost of most things is rising, not falling
Gasoline prices in June were higher at 8.6 percent than it was in May, however, producing an even rarer phenomenon of a negative inflation rate when prices have increased measured over the previous month.
Gasoline prices, which account for about 5 percent of the Statistics Canada basket of goods that make up the index, peaked at 136.6 Canadian cents last July and fell almost immediately afterward, reaching a low of 76.5 Canadian cents a liter in December.
But minus gasoline and the energy component, the cost of most things people purchase in Canada is rising, not falling.
Overall, only three of the major components that go into calculating the consumer price index were in negative territory last month: shelter, clothing and footwear, and transportation, which include prices for gasoline.The last time Canada experienced a negative annual inflation reading was in November 1994, after the government slashed tobacco taxes in an effort to halt burgeoning illegal cross-border traffic in cigarettes.
