Tomorrow’s News: Negative CPI is not Deflation

Stephen Gordon writes one of my favorite blogs on economics, and pointed out something interesting about what’s going to hit the news tomorrow.

The CPI will be negative. This does not mean we’re headed for deflation.

Brace yourself for stupid news articles in advance. As Dr. Gordon explains here:

Tomorrow’s headline inflation number will be calculated as follows: take the June 2009 number, divide by the June 2008 number, subtract 1 and multiply by 100. This number will almost certainly be negative, but it will most emphatically be not a sign that Canada has drifted into deflation.

The reason for this is that in June 2008, there was a runup in gasoline prices. Between May and June 2008, the transportation component of the CPI rose at an annual rate of some 22%, and this brought the annualised monthly inflation rate of headline CPI up to 8.8%. Since then, gasoline prices have fallen, and so has the CPI. So when the June 2009 numbers are published, the headline rate of inflation will be calculated using a base of  114.8. In May 2009, the CPI was at 114.1, so the only way we could avoid seeing a negative year-over-year inflation number is if June comes in at 114.8 or higher – an annualised inflation rate of 7.6%. If that happens, the real risk is of inflation, not deflation.

So tomorrow and Saturday, expect to see dumb headlines such as “Canada slips into deflation” in the MSM. Try to ignore them.

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