April 07, 2011
An Armchair Economist’s “Cheatsheet” to Inflation
Is inflation coming? A few reasons to believe it will: 1) “The Fed is printing money, and that always causes inflation.” 2) “Gas prices are so high, isn’t inflation obvious?” 3) “My salary has been stuck for three years straight, and my budget would be shot to pieces if prices go up. Murphy’s Law applies…inflation is coming.” All good watercooler topics. In sum, a weak argument. An Armchair Economist would do better to watch US Capacity Utilitization. If the number is low, inflation is further away. If high, watch out!
Why? Supply and demand is still the basis for pricing in competitive and open markets. Simply stated, it is hard for Company A to raise prices if Company B has the ability to respond by making more, spreading out their costs, and selling more at the old price. As a result, with excess production capacity, Company A and B might be losing money, but neither can raise prices. Even if their own costs are rising! (Beware the “business owners just pass along costs” argument…it implies robust demand and capacity utilitization.)
So how is US Industrial Capacity Utilization doing? In a word, “Lousy.” Simply put, the US can produce a lot more stuff. And helping it do so should be the primary policy concern of the government. (Industrial production = private sector jobs.) Where capacity utilitization is high (energy) or the markets are becoming less free (health care) inflation is creeping forward. But overall the numbers might reassure you that we all have a bit of time before Murphy’s Law kicks in on inflation. See the data: http://www.federalreserve.gov/releases/g17/current/default.htm
What did the government say about it, at that site?
“In February, manufacturing output rose 0.4 percent, and over the past 12 months the level of factory production has climbed almost 7 percent. Capacity utilization for manufacturing moved up 0.2 percentage point to 74.3 percent, a rate 4.8 percentage points below its average from 1972 to 2010 but almost 9 percentage points above its trough in June 2009.”
