The Costs of Inflexible Indexing: Avoiding the Adverse Fiscal Impacts of Lower Inflation

Major inflation-indexed government programs in Canada respond to rises in the Consumer Price Index, but not declines, leading to increased spending and reduced revenues for the government, according to a study released today by the C.D. Howe Institute. With a debate underway about whether it’s time for the Bank of Canada to move to a lower inflation target in a new inflation-control agreement, policymakers should address these asymmetries, say William B.P. Robson and Philippe Bergevin in The Costs of Inflexible Indexing: Avoiding the Adverse Fiscal Impacts of Lower Inflation.