So where do we stand with Inflation?
The world has a few other things on its mind right now − the credit squeeze, a financial system meltdown, the U.S. Presidential election, the Canadian federal election, talk about recession slipping into depression, etc. − so that all prior concerns about inflation are being ignored or forgotten. Central bankers are apparently hoping that problems in the pricing area will simply disappear as a result of the slowing world economy and the widespread drop in commodity prices.

Major Central Banks Cut Interest Rates by 50 Basis Points
On October 8th, major central banks around the world dropped their key interest rates by 50 basis points (100 basis points = 1.00%). The truth is that they felt this action was necessary to provide more liquidity to a financial system that remains in credit gridlock. As a sidebar, they are saying that the fears on the inflation front are fading anyway, giving central bankers the leeway to adopt a more stimulative monetary stance.

The assumption about weaker commodity markets and global demand helping to rein in prices is probably true. Nevertheless, inflation in a number of countries (Russia and the nations of South America) has reached alarming proportions. The August figure for all-items inflation in the U.S. was 5.4% year over year and in Canada it was 3.5%. It may take some time to purge the system of price excesses that have become built in and wage increases that are set in writing through labor agreements.

Conflicting Currency Implications
There are also some currency implications. The flight of international funds to the U.S. dollar, as an investment security measure, has meant an increase in value for the greenback. In the U.S., this will help to lower import prices and give extra help on the inflation-moderation front.

In Canada, the decline in value of the loonie − back down to $0.90 USD after sitting at parity for much of the past year − has a double-edged impact. It means that Canadians will not receive the full benefit of the drops in commodity prices that are underway, since such commodities are almost always priced in U.S. dollars. It will also raise the price of goods and services that are imported from south of the border.

An Expressway with no Off Ramps
The very low interest rates (see accompanying graphs) in the Unites States and Canada at this time are probably justified in terms of providing a shot in the arm to confidence and liquidity. However, a year from now, the balance of opinion may well be less favorable. Interest rates as low as they are now have, in the past, proven to be “an expressway with no off ramps” when it comes to inflationary expectations.

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