The latest Canadian inflation figures inspire descriptions like benign, subdued, tepid and tame. Consumer price inflation remained steady in September at an annual rate of 1.1 per cent. The core price index, which excludes more volatile food and energy costs, also didn't budge from the previous level of 1.3 per cent. With inflation essentially a non-factor, the conventional wisdom is that the Bank of Canada can afford to leave monetary policy untouched.
In reality, though, Governor Stephen Poloz ought to be contemplating a change in policy. He has already indicated that economic growth has been disappointing. The proper response would be a cut in interest rates, particularly if the central bank wants us to believe that it takes its vaunted price stability target seriously.
Right now, although prices have been rising slightly in most categories (led by booze and tobacco), the inflation rate sits perilously close to the bottom end of the bank's target range of 1 to 3 per cent, well below the mid-point of 2 per cent the bank and its counterparts in other developed countries regard as ideal. Now, 1 per cent would be welcomed in deflation-ravaged Japan, which hasn't posted a level that high since 2008. But it ought to be setting off warning bells here.
The Bank of Canada itself has declared that it "views with equal concern the risk of inflation moving above or below the 2 per cent target and acts symmetrically to avoid both significant inflation and deflation over the medium term." Given that clear statement and the apparent lack of concern about inflation remaining well below the optimal level – where it is expected to stay through 2014 – it would be reasonable to assume the bank would take a similar hands-off-the-policy-levers approach if prices were to rise to the top end of the range.
But it seems unlikely that the economic soothsayers or the Bank of Canada itself would take a similarly sanguine view of inflation climbing to 3 per cent. The tightening noises would begin well before that. If all points within the bank's range aren't equally acceptable, it ought to stop pretending that its targeting is symmetrical and change its misleading language.