Among developed nations, the big economic talking point of 2014 for experts is the threat of deflation.
Deflation is a phenomenon of falling prices.
The 18-country eurozone has been flirting with deflation, with the single currency bloc reporting shrinking inflation over the past few months. Core inflation for consumers — excluding food and energy prices — came in at 0.8% in December, slightly higher than November 0.7%.
However, that is still below the 2% inflation rate that the European Central Bank considers ideal for its mandate of maintaining price stability.
Meanwhile, Japan has been stuck in a deflationary quagmire for the past two decades.
Now, it seems Canada could be joining the list of countries fretting about falling prices.
Inflation has slumped below 1% (on an annual basis), which is below the central bank’s target band of 1% to 3%. The bank’s key lending rate has remained at a low 1% since September 2010.
It’s a tricky situation for central bank governor Stephen Poloz, who has a dilemma on his hands: if he cuts the interest rate (which is what a central bank should ideally do to stimulate spending and fight deflationary pressures), he could exacerbate a housing market boom (the bank wants to gently slow down the boom) and halt the welcome slide in the Canadian dollar, which could hurt exports.
In contrast, a rate hike would force consumers to tighten their purse strings and do more good than harm in the battle against looming deflation.
(For an explanation on how deflation threatens economies, click on this link.)