OTTAWA - Canada is expected to experience an economic oddity Friday that few thought possible before the world was turned upside down a year ago -- annual inflation below zero.
When Statistics Canada releases new data on what happened to June prices Friday morning, most economists are convinced the annual rate will fall to a negative 0.3 per cent -- from being just on the positive side of the line in May.
Even stranger is that inflation is going negative at a time most Canadians would swear they are paying more for goods and services every month, and they would be right.
The monthly index -- which is how most Canadians experience inflation because it measures the most recent change in prices -- has been inching mostly up and will continue to do so for the rest of the year.
But Canadians are likely to have forgotten the pain of having to pay about $1.40 a litre to fill up their vehicles last June and part of July as oil prices were spiking toward a new record. It's against those prices that the annual inflation rate is measured.
It doesn't take a mathematician to figure out that if gas is at a relatively high $1 a litre today, that's still a huge slice off any family's expenses from last year.
"This is more of a story of how high gasoline prices were a year ago than how low prices are today," explained CIBC chief economist Avery Shenfeld.
"This June's gasoline price generates such a large saving from a year ago that it swamps inflation and everything else."
The turn to negative inflation was predicted months ago by the Bank of Canada as a result of weak consumer demand and the unusually strong rise in the cost of energy during the spring and early summer of 2008, when oil spiked at US$147 a barrel.
Canadians have been getting doses of price cuts in other areas such as autos, home prices and mortgage rates, which have come down considerably since last year.
The latter two costs, which affect housing affordability, is a key reason home sales have remained relatively healthy in the midst of an economic meltdown and the loss of about 400,000 jobs since last October.
The Canadian Real Estate Association reported Tuesday that house resales totalled 147,351 units in the April to June period, 1.4 per cent more than the same period last year before the downturn hit.
Meanwhile, food costs have been rising and were 6.4 per cent higher in May than they were a year earlier.
But it has been gasoline that has dominated the inflation picture in the past year, both up and down, said economist Douglas Porter of BMO Capital Markets.
Gas accounts for about five per cent of the Statistics Canada basket, so a 30 per cent move can shift the overall index by 1.5 points.
That's what happened in 1994, when one item skewed the inflation picture.
The index briefly dipped below zero after Ottawa slashed tobacco taxes to stem a burgeoning cross-border smuggling operation in cigarettes.
Since gas prices fell almost as quickly as they rose last year, economists are quick to point out that the negative inflation reading will have as short a shelf-life this year as it had 15 years ago.
As well, they point out that Canada's domestic economy and credit markets, while weak, are healthier than those in the United States, where deflation remains a concern.
Scotia Capital economist Derek Holt noted that Tuesday's liquidity offering by the central bank was only partially drawn down by Canada's chartered banks, which also mostly shunned Ottawa's last mortgage asset swap, exchanging only $1 billion in mortgages out of the $4 billion available.
The money channels in Canada appear to be holding up fairly well, so low interest rates stand a greater chance of flowing straight through to borrowers and stimulating economic activity," he explained.
And with billions of dollars in government stimulus coming down the pipeline, the next future problem is more likely to be runaway inflation than deflation.
But few expect that will be any time soon.
Holt does not believe inflation will return as a serious problem in Canada for another three or four years.
His bank recently rethought its advisory that had the Bank of Canada moving to raise interest rates as early as the first quarter of 2010.
In April, central bank governor Mark Carney issued an unusual conditional pledge to keep the policy rate at the lowest practical 0.25 per cent until the second quarter of next year.
That date will likely be kept, Holt said.
He predicted the bank's next move will be to wind down the unconventional policy measures introduced to inject cash into money markets, such as the term purchase and resale agreements, because banks are no longer experiencing difficulty borrowing through normal channels.
