This post is premature. It's too early to say for sure. And I don't have any real answers to explain this (possibly non-) event. I'm trying to fit together a number of things that have been puzzling me.
The first puzzle is why inflation targeting failed. The Bank of Canada succeeded in keeping inflation on target, but keeping inflation on target failed to prevent the recession.
The second puzzle is why inflation did not fall below target during the recession. Why was inflation so persistent? Did inflation targeting make inflation stickier?
(The first and second puzzles are closely related. You might say they are just different ways of looking at the same puzzle.)
And now a third related puzzle seems to be emerging, though it's still a little too early to say for sure. Just as the economy has more or less recovered from the recession, with the unemployment rate back down to 7.1%, inflation seems to be finally falling well below target.
Here is Chart 4 from Statistics Canada's December CPI release, showing seasonally adjusted CPI:
Here are some more data from the Bank of Canada, showing various measures of core and headline inflation.
Any way you measure it, inflation has been falling, and falling below target, over the last few months. The price level (both total and core) was about the same in December as 8 months previously. Inflation seems to have fallen to zero.
This post is about Canada, and the Canadian picture-puzzle is clearer (to me anyway). But I don't think Canada is alone.
8 months is not long enough to say for sure. But it looks like inflation might finally be doing what it was supposed to have done a couple of years earlier. If so -- if this recent trend is in fact a trend -- why the long lag? Are the supertankers of the Phillips Curve finally turning south, nearly 4 years after the canoes jumped south? Just as the recession is finally ending?
[My blogging will probably continue to be very light in the next few weeks.]