Our high-priced deflation.

The COVID Price Index is like a funhouse mirror: very hard to read. Am I fat or am I skinny? Tall or short? Are we having deflation at the moment or inflation?

Statistics Canada reported Wednesday that headline inflation was negative in April, which means in English that we had deflation: on average, prices went down. On a seasonally adjusted basis they were down 0.7 per cent for the month, which is an impressive minus 8.4 per cent if you multiply by 12 to approximate the annual rate.

And no wonder! Gas prices were down 39.3 per cent from last April — a record collapse. Clothing and footwear prices were down 5.9 per cent for the month. Traveller accommodation was down 8.9 per cent yearover- year. In Ontario, electricity rates were down 12.6 per cent year-over-year, though mainly because, with so many people staying home, the province suspended time-of-use pricing.

You know the last time prices fell like this? That’s right, during the Great Depression. Massive unemployment and lack of monetary and fiscal stimulus led to consistently falling prices all through the early 1930s — a comparison that, apart from being totally depressing, makes some people think we should torque the stimulus levers and crank up the Bank of Canada’s already smoking money machine.

But did you notice something about the big price drops quoted? For gas, for clothing and footwear, for traveller accommodation? These are all things nobody is buying. I haven’t bought gas in a month. (Living in hope, I did get my winter tires changed this week.) Traveller accommodation? Great deals are available but no one can take advantage of them. In fact, they’re available precisely because no one can take advantage of them. As for clothing and footwear: you can buy it online but most people still like to try things on — which hasn’t been possible since midMarch.

In sum: the prices that have fallen most are of things people aren’t buying. That’s interesting but doesn’t hit people where they live.

Where they do live, we have inflation. Start with this pandemic’s icon: toilet paper. The “paper supplies index,” which includes TP, was up 6.0 per cent, its largest monthly increase ever. The “household cleaning products” index was up 4.6 per cent. Food prices were up 3.4 per cent year- over- year, with pork up 9.0 per cent, beef 8.5 per cent, rice 9.2 per cent, eggs 8.8 per cent, margarine 7.9 per cent, and so on.

So which is it? Inflation or deflation? We have falling prices for the things we can’t buy but rising prices for things we can. We have deflation across the basket of goods we usually buy but inflation across the much narrower range of goods we’re buying now.

Which matters? Where people live is generally what matters. Our economic behaviour depends on our real, i. e., inflation- adjusted, costs and incomes. So while the official data tell us life is getting a little easier for consumers because the prices of historically important consumer goods are going down big-time, the data on the street tell us that with people’s earnings being squeezed and prices rising for the essential items they’re focusing on for the moment, life is getting harder.

If you’re the Bank of Canada, what do you do? There is a lobby for printing all the money the presses can print. But the problem in markets where people are actually spending is inflation. And we’ve got it because in many of those markets there are supply problems — almost Soviet- style supply problems ( a problem I reflect on these days as I queue, like a Brezhnev- era Muscovite, outside supermarkets and pharmacies). Pumping more liquidity into those supply- restricted markets won’t get output delivered any faster. The price signals are already urging increased production. The problem is medical or regulatory bottlenecks somewhere along the production chain.

Forecasting is always difficult but in uncharted (not unchartered!) waters it’s especially daft. If I had to forecast, I’d say a lot of the deflation we’re seeing now is short-term. If you go back to intro econ, businesses produce in the short run if they can cover their variable costs.

A Winnipeg restaurateur was on the news the other day talking about how if he can cover wages and supplies, it’s worth it to open even if he doesn’t cover all his costs. To get people through the door, price cuts may make sense, which is why we’re seeing them in those hard-hit “menu and venue” industries.

But for the long run businesses need to cover all their costs. In lots of industries, operating just got significantly more expensive and it will stay expensive until we either get a vaccine or get to herd immunity. Restaurants and airlines that have to space customers out, take their temperatures and clean premises many times daily have to cover those new costs. In a lot of industries, profitability will require higher prices.

So, to my eye, the funhouse mirror is showing inflation.

PRICES THAT HAVE FALLEN MOST ARE OF THINGS PEOPLE AREN’T BUYING.