OTTAWA - Canada's economy is displaying fresh symptoms of a slowdown, with data released Friday showing inflation falling to the lowest level in three years and output barely growing.
Statistics Canada's consumer price index fell four-tenths of a point to 0.8 per cent in November — the lowest since October 2009, when the country was just emerging from a deep slump.
Meanwhile, the economy grew by a minimal 0.1 per cent after a flat month in September and 0.1 per cent contraction in August. Over the past three months, Canada's economy has essentially not grown.
It was a good day for the pessimists.
Markets were also weighed down by a setback in negotiations to avert a budget crisis in Washington, which has the potential to drop the U.S. into another recession sometime next year.
After a vote failed in the House of Representatives on Thursday, Republican majority leader John Boehner said Friday it will be difficult for the two sides to bridge the gap.
The Canadian dollar was down about half a cent Friday afternoon, although it had been even lower in the morning. The Toronto stock market was little changed.
A loss in U.S. growth would also rebound on Canada, which is experiencing problems of its own, including a cooling housing market and high consumer debt.
"Our bearish call a year ago for moderate to weak GDP growth, subdued inflation and prolonged low interest rates is looking prescient now," said David Madani, an analyst with Capital Economics in Toronto.
He says he expects the Canadian economy to grow at only one per cent next year.
That's about half the consensus forecast. Many economists believe Canada's growth will strengthen next year, although it may not come until the second half of 2013.
Low inflation is often seen a a positive for consumers, since the buying power of their dollar remains intact if prices remain stable. Even small wage increases above the inflation rate can improve personal finances.
But Bank of Montreal economist Doug Porter cautions about "too much of a good thing" — such as a period of falling prices, or "deflation" — that could be caused by lower housing prices, high consumer debt and government spending restraint.
"I don't think we're in the danger zone yet, but we're not far away," Porter said.
"(Deflation) means debtors can find themselves in deep trouble ... because it means their debt actually starts going up in real terms and as we've see in Japan, once you slip into deflation, it's a trap that's difficult to get out of," Porter said.
It would particularly problematic for Canada because household debt is now at a record 163 per cent of annual discretionary income.
The Bank of Canada considers two per cent the ideal inflation rate, and hopes at worst to keep it within a range of one-to-three per cent.
Falling prices are not expected in Canada, however. While weak, both the global and Canadian economies are still growing. As well, few expect world oil prices, the major reason for October's price fall-off, to keep falling.
One indication that steep drops in prices are unlikely was that core inflation — a measure of underlying pressure that excludes volatile items such as energy and fresh fruit — mostly held its ground at 1.2 per cent in October.
The major contributor to the low headline number was a one-month 5.7 per cent drop in gas prices from October, which took pump prices to about where they stood a year ago.
In addition, Statistics Canada said automobiles cost 1.8 per cent less last month than they did in November 2011, mainly due to rebates dealers have put in place.
In an accompanying note, Statistics Canada said it had adjusted how it measures the passenger vehicle index to better reflect manufacturers' marketing strategies for new models, but the change would not have altered the result for November. The agency said it will make further modifications in March.
On a monthly basis, the agency's basket of goods it measures cost 0.2 per cent less than it did in October.
While prices continued to rise moderately on most items, there were also outright declines.
Fresh vegetables were 5.8 per cent less expensive in November than a year ago, mortgage interest costs were three per cent lower, natural gas fell 6.8 per cent, video equipment 12.7 per cent, transportation 0.2 per cent, and clothing and footwear 0.6 per cent.
On a monthly basis, prices were lower on gasoline, clothing, electricity, hotel rates and mortgage interest costs.
Regionally, inflation was highest in Prince Edward Island and Quebec at 1.5 per cent, and lowest in British Columbia, at a barely visible 0.1 per cent.
What Is Inflation?
Inflation refers to the increasing price of goods and services that ultimately decreases a nation's purchasing power. As the cost of living increases, each unit of currency buys less. The result is a decrease in the value of a nation's currency.
Inflation is measured by Statistics Canada using the Consumer Price Index (CPI). The cost of a fixed "basket" of goods and services purchased by typical consumers is tracked over time. About 650,000 prices are checked each year across Canada.
The number that determines the rate of change of prices (usually calculated monthly or annually) is the rate of inflation. The core rate of inflation excludes the most volatile items in the CPI basket, such as gasoline, vegetables, and tobacco.
International Lending And Exchange Rates
As nations borrow money from each other, prices can rise as a response to interest and national debt. Inflation can also occur when a currency's exchange rate plunges, causing imports to spike in price.
The Money Supply
Widely considered a long-term cause for inflation is the amount of money in circulation. However, there is disagreement among economists as to how the money supply affects inflation. Many say that as governments print excesses of money to cope with crises (for example, to revive an economic recession), prices increase dramatically. But others argue the recent economic crisis, which resulted in the printing of money but little inflation, disproves that theory.
Production And Labour Costs
Production and labour costs are factors contributing to inflation. If the raw materials for a product increase in price, so does the price of the final product. Similarly, a rising cost of living causes workers to demand increased wages--costs that are passed on to the consumer.
When prices fall, what occurs is the opposite of inflation: deflation. This is typically considered dangerous because lower prices can correspond with lower demand, leading to a deflationary spiral. Depressions are linked to deflation, but deflation itself doesn't always symbolize a bad economy. For example, more efficient production can result in price deflation, but that doesn't indicate a shrinking economy.
Fast economic growth is not always beneficial because it can lead to hyperinflation--a cycle of rapidly rising prices. When there is a drastic increase in the money supply without a corresponding increase in demand, the value of each unit of currency diminishes. In the picture above, a woman protests hyperinflation by carrying around worthless notes in Serbia during its hyperinflation crisis in 1992.
The Bank of Canada employs interest rates to maintain a target inflation rate. The bank can raise interest rates when inflation is too high, or lower them when it's too low. With high interest rates, demand typically decreases for certain goods and services as they become harder to finance.
Other Methods Of Control
In an attempt to control inflation, Prime Minister Pierre Trudeau's government introduced the Anti-inflation Board (AIB) in 1975. It was the board's responsibility to supervise and control wages and prices, and was part of a 1970s trend -- followed even by U.S. President Richard Nixon -- that saw politicians attempt to legislate away inflation. Canada's program was phased out in 1978, and most Western countries abandoned price controls after finding them largely ineffective.