Observing the economy is akin to studying any other body of science. The ocean tides, the human body, the plumbing in your home, electrical systems; all are circulatory in nature. There is a fluid motion, which can be accelerated, obstructed or disabled. All of these systems must be monitored and sometimes intervention is required to improve efficiency or direct an outcome.
The economy, like our bodies, is a connected structure of interrelated systems. A decline in energy prices, like a gash on your arm, does have repercussions for the entire health of the larger system. Attention must be diverted to address an area of concern.
Inflation is blood pressure. There is a normal range where you want to keep your pressure, and either elevated or decreased levels are unadvisable. High interest rates cut off capital flows and restricts capital movement, low rates can cause accelerated flows and do long-term damage if not kept in check.
There are interventions that can be implemented to try and maintain optimal levels of pressure; in the economy there are interest rates and monetary influences. The individual has little control on these external factors, but must adapt to this stimuli.
Just like the body, our environment affects the economy. In particular the strengths or weaknesses apply pressure to our Canadian or local PEI economy. This week the U.S. signaled that Canadian interest rates may be impacted by the strength of the U.S. economy. Thus we are forced to adapt to a condition outside of our control, and perhaps contrary to the intervention we would expect.
The Consumer Price index (CPI) is a measure of the purchasing power of consumers. If the CPI is low, there is little change in the prices of goods, if the CPI is high we are in an inflationary environment and the government will want to raise interest rates to slow the accelerating pace of the economy.
In April the Canadian CPI experienced the smallest growth since 2013. This signals an economy which is not feeling any upward pricing pressure. PEI experienced a marked decrease in CPI, as we were ten times more impacted by the price of fuel than the national average. In fact our CPI decreased by 1.2 per cent from April 2014 to April 2015.
Surprisingly, as our inflation levels are declining, there are signals that interest rates may be ready to increase. The combination of these factors might suggest that we could be facing an unrequired cooling of our economy.
Just like getting a check-up from the doctor, it is good to understand your health, health issue prevention, and how to adapt to changing circumstances beyond our control.