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Inflation and deflation in Canada

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In times of fast-changing prices, managing the family budget—not to mention multi-million dollar business operations—involves considerable guesswork about where prices will be in a month, a year or even further down the road.

Fortunately for Canadians today, the average rate of inflation from 1992 to 2004 was just under 2%—one of the longest periods of low and stable inflation this country has ever seen. In July 2005, inflation was exactly 2%. If prices continued to rise at this pace, they would double by 2039.

This stability has helped Canadians maintain their purchasing power and has created a more stable and predictable economic environment. But this has not always been the case. Over the past century, Canadians have seen periods of both high deflation and high inflation.

Although just nine deflationary years have occurred in Canada since 1914, they have been vicious. During the early 1920s, for example, prices dropped a total of 20%. And during the worst years of the Great Depression, from 1930 to 1933, prices fell a total of 25%. Since falling prices lead to lower profits, shrinking incomes and higher unemployment, the deflationary cycles during these periods tended to reinforce themselves, and were particularly difficult to break.

Conversely, a generation of Canadians grew up in the 1970s and 1980s with the expectation that prices would rise considerably year after year. The inflation rate during this period fluctuated widely, running anywhere from 2.9% to 12.4%, but was generally quite high, averaging 7% each year. Canadians also saw prices jump significantly during the three-year periods following the two world wars. The highest rate of inflation ever recorded in Canada was in 1917, when prices climbed 19% in a single year.