Home > macro economics > No Chance of Inflation in Canada – Long Term

No Chance of Inflation in Canada – Long Term

Do you really think we are in inflation? When was the last time you paid for something that costs less than it did a year ago?… Never, that’s right… here is Canada’s historical inflation rate

If you want to know whether the bond market expects inflation or deflation, you don’t need to be a rocket scientist to figure out… it is very simple.

The implied or expected inflation rate is the difference between the yield on a nominal Government of Canada bond and the equivalent maturity real-return (see definition below) Government of Canada bond. The chart below clearly shows that markets expect inflation to hover in the 2% range in the long-term.

Real-return bonds are Government of Canada bonds on which the principal and coupon are adjusted based on the inflation rate as measured by the Consumer Price Index. If inflation is increasing, then the coupon and principal on a real-return bond increases proportionally.

Deflation means persistent negative year-over-year change in Consumer Price Index… from a historical perspective, Canada had 2 bouts of deflation – both during the Great Depression of the 1920s/30s.

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  1. September 10, 2010 at 5:29 PM | #1

    AFAIK, an RRB’s coupon is tied to CPI. Depending on how you define inflation, an RRB may not necessarily give an accurate proxy of changes in money supply. Another method you can use is to look at fixed-variable swap spreads which are not directly tied to a CPI model.

    • September 11, 2010 at 11:36 AM | #2

      RRB is tied to CPI as defined/measured by StatCan… i don’t think StatCan CPI is a true inflation measure but there are few alternate and broadly available measures…

      yes, that would be another way only if swap rates/spreads were readily disclosed and if there was a market for inflation linked swaps, right?

      • September 11, 2010 at 5:56 PM | #3

        I don’t know about Canada but there are USD denominated duration swaps readily traded through US OTC shops. You could probably synthesize a CAD one but I don’t know too much about that sort of thing.

        I guess what I’m seeing is a disconnect between long bond yields and reported CPI, which makes me skeptical to use CPI as an exclusive measure of inflation.

  2. September 13, 2010 at 12:49 AM | #4

    CPI is a very difficult to understand concept of recording inflation. My grocery bills says that there is an inflation, which is way more than 2%.

  1. January 2, 2011 at 2:47 PM | #1

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