The Correlation Between Inflation And Unemployment

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Humber College
Macroeconomics Group Project
The Correlation Between Inflation & Unemployment

Group 5 Members: Candace Crook, Michael Catalfamo, Melissa Faria, Krishna Lad, Kerri O’Hara, Stephanie Procenko & Brandon Vel

Executive Summary
Within this report data was collected and analyzed to determine whether inflation rates and unemployment rates had a negative correlation to one another. According to the theory, the more the Consumer Price Index rises, the lower unemployment rates will become. The goal of this paper was to either prove or disprove whether provincial inflation is negatively correlated to provincial unemployment rates, whereas when a provinces’ inflation increases, their unemployment rate decreases.

There are many factors in each province that contribute to each rate and include: population sizes, employment insurance benefits, and how much money a province generates; therefore it was important to research inflation rates and unemployment rates for Ontario(Canada’s largest population with approximately 39% of all residents), Alberta(Canada’s richest province), and Newfoundland & Labrador(one of Canada’s smallest and poorest provinces). The data was collected from the base year of 1992 to the end year 2012. The report is broken into four key sections, background, methodology, analysis, and conclusion.

The background information consisted of research to help understand policy information and economic factors that influence both the consumer price index and unemployment across the three provinces. It includes information about how The Bank of Canada uses an inflation target to keep inflation at approximately 2% to prevent periods of boom and deflation. It also defines why each province measures different levels of unemployment.
In the Methodology section, all of the data collected has been organized into provincial categories for unemployment and inflation. This information was used to conduct an analysis and run a correlation test.

During the analysis, correlations were determined to be negative for each province. Ontario showed a weak negative correlation of -0.41, Alberta had more moderate negative correlation of -0.64, and Newfoundland & Labrador had the strongest negative correlation of- 0.94.

This was followed with the analytical breakdown of what each provinces correlation between inflation and unemployment indicated and why. For example, the reason Newfoundland had the strongest negative correlation because for almost every year from 1992-2012, their inflation grew slowly and unemployment declined in relation.

Finally, a conclusion was generated based on the background knowledge and analysis and based on information from the background. An example of this explains why Ontario had a weaker negative correlation because their population of Ontario was young and had high levels of frictional unemployment.

Table of Content
Background………………………………………………………………………………..pg.4
Methodology………………………………………………………………………………pg.8
Analysis……………………………………………………………………………………pg.9
Conclusion…………………………………………………………………………………pg12
Work Cited……………………………………………………………………

Background
Background information for the Canadian Consumer Price Index
The consumer price index (CPI) most accurately measures inflation within a country. In economics, the CPI helps define how price levels increase, and subsequently, their purchasing power decrease.
Before 1991, Inflation in Canada went through periods of boom and recessions. During booms, the economy experiences large inflation rates and the economy benefits for a short period of time. However, periods of boom were followed by recessions that had serious impacts on unemployment rates. During recessions, the economy experiences deflation and many jobs are lost. In 1991, The Bank of Canada implemented an inflation control target to keep the rates between 1 and 3 percent. This target would prevent Canada from experiencing periods of extreme boom and recession by keeping the
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