Tuesday, 11 August 2009

Inflation, Alcohol and the Bank of Canada - an Unhealthy Mix?

"Inflation is like alcoholism.

When you start it, the good effects are immediate, and the bad effects come later.

When you want to stop it, the bad effects come immediately, and are very painful, and the good effects come much, much later.

And, like alcoholism, the later you stop inflation, the more you will suffer, and the longer it will take -- but, eventually, you will always have to stop it, or you will die."

(quote found in comments attached to Deflation in America: The greater of two evils on the Economist magazine website)

The Bank of Canada (BOC) seems to believe in an extension of the alcohol analogy, viz that a little bit of alcohol is good for you (see BBC article). The explicit policy of the Bank is that inflation should always lie in the range of 1-3%. It has been remarkably successful in that endeavour as inflation has averaged 1.96% since 1995, as can be found by plugging in the numbers on the Bank's inflation calculator.

Now comes the baffling bit. Another BOC background page says: "A situation where inflation is low enough so that it no longer affects people's economic decisions is referred to as price stability." Huh? Does BOC mean that if we don't notice, 2% inflation is price stability? It must be since another BOC page says "

Low inflation has many benefits

  • Consumers and businesses are better able to make long-range plans because they know that their money is not losing its purchasing power year after year."
So, low inflation (2%) = not losing purchasing power? Let's see, back to the BOC inflation calculator ... between 1995 to 2009 a $100 basket of goods in the CPI would cost $131.24. That's not exactly "not losing purchasing power".

Dear folks at BOC, why exactly do we need any inflation - why not target 0% and +/- 1% as the bounds? Deflation seems to be the big fear, the experience of the 1930s and Japan in the 1990s being cited everywhere as the reason to never, under any circumstances to allow the tiniest bit of deflation to occur. Yet the 1970s inflation, for those of us old enough to remember, was no pleasant time. Inflation transfers wealth from savers to borrowers and spenders, and deflation does the opposite. Shouldn't it be a level playing field rather than a permanent tilt to one group?

Oh, and alcohol is not like the rest of inflation. Stats Can's CPI Index and Major Components shows that alcohol and tobacco price increases far outstripped the general level of price rises, going up 32% since 2002 alone while CPI rose only 15%. Maybe everyone needs to lay off the booze a bit, in more ways than one. Claiming only the health benefits of alcohol without considering the risks isn't smart.

1 comment:

as said...

Give me enough alcohol and I no longer care about no darn inflation...

Here's wikipedia on the need / positive aspects of (some measure of) inflation:


E.g., controlling the money supply, investment in the economy, debt relief (such as governments').

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