Tags: China | inflation | capacity | utilization

China's Economic Woes Reduce Odds of Inflation

By    |   Wednesday, 11 Jun 2014 07:58 AM

Inflation is the result of too much money chasing too few goods. Both pieces — too much money and too few goods — need to be in place before inflation becomes a concern. The Federal Reserve and other central banks around the world are doing their best to create too much money, but the global economy has too much excess capacity to allow shortages of goods to become a problem.

Capacity is the amount of goods and services an economy is capable of producing. An economy rarely uses all of its available capacity. Some factories will be offline for maintenance, for example. In other cases, some industries build too much capacity in boom times and excess capacity sits idle in a slowdown. In the past 30 years, capacity utilization in the United States has generally been between 75 percent and 85 percent. It currently stands at 78.6 percent, near the low end of the range.

When capacity utilization is low, inflationary pressures are low. Manufacturers can increase production without building new factories, and that leads to less competition for goods.

Looking at the world's second-largest economy, China, capacity utilization has fallen below 60 percent, according to some reports.

With so much excess capacity, there is room for growth before inflationary pressures rise. This gives the Fed room to maintain some form of quantitative easing indefinitely and it allows the European Central Bank to ease more aggressively.

With so much excess capacity in the world, it is likely the problem will exist for years. Deflation really might a bigger concern than inflation.

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MichaelCarr
Inflation is the result of too much money chasing too few goods. Both pieces — too much money and too few goods — need to be in place before inflation becomes a concern.
China, inflation, capacity, utilization
259
2014-58-11
Wednesday, 11 Jun 2014 07:58 AM
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