Wednesday, December 15, 2010

Capacity and Inflation

My view yesterday of inflation.

My view? Unless we see a pickup in employment (we may), all the stimulus (fiscal and monetary) will just feed into the rise we are seeing in commodities, not overall price levels. If corporations / individuals don't see a corresponding pickup in profits / income, then all this means is less money for non-core items. The result? A split between headline and core inflation. Just what we have seen thus far...
Capacity utilization strongly (in my opinion) supports this view. While excess capacity has declined (a lot) since the lows, it is still very low relative to historical levels WITH THE EXCEPTION OF MINING (in the U.S. at least - globally levels may be different, though unlikely.

Result? The potential for commodity and core inflation to remain bifurcated going forward.

Source: Federal Reserve