Inflation is still a worry for policy makers on both sides of the 49th parallel. It's just not the same worry.
Economists expect that this week's consumer price index (CPI) reports for both Canada and the United States (Thursday for the U.S., Friday for Canada) will show small dips in prices in October, pretty much entirely owing to tumbling gasoline prices.
Despite the monthly declines, economists expect that Canada's year-over-year CPI inflation rate held steady at 2 per cent in October. The so-called core inflation rate (excluding the most volatile components, such as many foods and fuels) is also expected to be unchanged, at 2.1 per cent.
In the United States, economists expect that the total inflation rate held steady at 1.7 per cent, but they believe the core rate might have dipped one-tenth to 1.6 per cent.
These steady-as-she-goes numbers aren't the kind that should rattle consumers one way or the other; over all, inflation in North America is in a reasonably tame and comfortable zone, a statistical rec room. We're safely removed from the deflation fears of the Great Recession and financial crisis, still further removed from the distant memories of the double-digit inflation of the early 1980s.
Nevertheless, inflation's next move is critical to central bankers, as they determine when to pull the trigger on their first postrecession interest-rate increases – likely some time next year for both countries, but the shifting sands beneath the economy could still have something to say about that.
The Bank of Canada's monetary policy is legislatively bound to the pursuit of a CPI inflation target of 2 per cent. Yes, it's a flexible target; the bank talks about it as the midpoint of its target range of 1 to 3 per cent. But normally, once inflation starts rising above 2 per cent (especially the core rate, which the central bank focuses on as the more reliable indicator of the inflation trend), rumblings of rate increases can be expected to begin.
Interest rates are the primary instrument central banks use to nip inflationary pressures in the bud.
That's precisely what inflation did this year. Yet the Bank of Canada has made it abundantly clear that it's not about to let the current rate dictate its policy leanings. It doesn't believe the number has much staying power, and it's determined not to get all aflutter over a temporary blip above its target. The economy still has too much excess capacity to generate sustained inflation pressures, it says, and the inflation rise largely reflects the decline in the Canadian dollar and short-term spikes in things such as meat and telecommunications products, the impact of which will fade over time.
Still, with overall inflation poised for its seventh straight month north of 2 per cent and the core rate set for its third straight month, the temporary blip is looking less temporary. Unexpectedly high inflation numbers in October would raise new questions about the central bank's resolve.
In the United States, the worry is in the other direction. Thanks to a surging U.S. dollar, and tumbling energy and commodity prices, both total and core inflation have been falling since the spring.
The strengthening U.S. economy has convinced the U.S. Federal Reserve Board to likely start raising interest rates by the middle of next year, but the Fed, too, aims to keep inflation close to 2 per cent (though it's not a formal target for the U.S. central bank). The further inflation falls away from the target, the more questions arise about whether the Fed might have to delay the start of its rate cycle.
Of course, the Canadian and U.S. inflation concerns are small potatoes relative to the massive Russets that are surfacing in Europe.
The European Union reported Friday that year-over-year inflation in the euro zone was a puny 0.4 per cent in October, up only slightly from 0.3 per cent in September. Core inflation, meanwhile, slipped one-tenth to 0.7 per cent.
Europe is still dancing dangerously close to all-out deflation, a notoriously toxic economic state. The European Central Bank may soon have no choice but to jump whole-hog into quantitative easing, aggressively buying assets to inject large quantities of funds into financial markets as the U.S. Fed has done over the past several years, in an all-out effort to turn the tide.
This week's North American CPI reports don't have nearly the same edge-of-your-seat dramatic potential.
Still, inflation (or lack thereof) has never been far from the minds of economists and policy makers ever since the financial crisis and Great Recession. The gyrations in these even apparently tame inflation rates could have considerable implications for the trajectory of interest rates. They are sure to be dissected by the experts, and the markets, with that in mind.