Capacity utilization is not very helpful in predicting inflation

11 Feb 2011 by Jim Fickett.

Capacity utilization would not have been of much use in understanding the danger of the high inflation that peaked in 1980.

How many times have you read a reporter or economist claiming that there is no danger of inflation because capacity utilization is currently low? The question that must be asked is, on what time scale?

Here is the record, for the famous period of high US inflation from the mid 1960's to the mid 1990's:

(The inflation rate shown is the year over year change in the not-seasonally-adjusted consumer price index for all urban consumers, all items less food and energy, from the BLS. Capacity utilization is for all industries, from the Fed, through the Federal Reserve Bank of St. Louis.)

On a real-time basis there is no correlation between the two series. On the scale of a year or two there is probably significant delayed correlation, though this seems to become very weak in the later years of the period shown. On a longer scale, the trend rise in inflation from 1967 to 1980 corresponds to a trend drop in capacity utilization.

At least from this limited data, it would seem that for the medium term, say 3-10 years, capacity utilization is completely irrelevant to an understanding of inflation risk.