TD Bank economists say that even with the precipitous drop in Canads’s inflation rate over the past six months, the Canadian economy is in no danger of entering a period of deflation.

Deflation is formally defined as a sustained decline in the general price level. The level of all consumer prices must be falling. “This is different from a situation in which some prices decline, and drag the measured CPI into negative territory as a result,” TD notes. “And the decline must last for a meaningful period of time — long enough to have an impact on the behaviour of consumers and businesses. A couple of months does not cut it.”

Deflation is feared because it is associated with periods of extreme economic distress. And it can in itself significantly aggravate an economic downturn. “Falling prices, coupled with the expectation that they will keep heading lower, can lead consumers to defer purchases that they otherwise would have made. Deflation leads to an increase in the real indebtedness of firms and households, and a consequent deterioration of their balance sheets, which further weighs on economic growth — potentially creating a debt-deflation spiral.”

“However, Canadians need not stay awake at night worrying about deflation,” says TD. “Even if the headline CPI does dip into negative territory over the next few months, it will only be for a short period of time. Moreover, the slide is nowhere near being broad based. The current situation is a classic case where a relatively limited subset of goods and services have seen substantial declines which have driven the measured CPI lower – a shift in relative prices rather than actual deflation.”

It notes that swings in energy costs account for almost the whole story. “But the prices of the vast majority of goods are still rising. Meanwhile, the prices of services – which account for more than half of all consumer expenditures – are still running at a year-over-year clip of 2.2%. Wages, as measured by the average hourly earnings of permanent workers are still growing at an annual pace of 2.5%-3.0%. Inflation has certainly come down. But deflation this is not,” TD concludes.