Inflation is a general increase in the price level of goods and services. It is also thought of as a monetary issue. It used to be taught that inflation is always and everywhere a monetary phenomenon. Sounds easy enough, but it is relatively hard to separate general price changes from relative price changes. For example, the price of food and energy is going up, but this could be related to the demand for these specific products or to problems in supply and not inflation. This is why food and energy are excluded from the core inflation rate.
The signs of inflation are complex, but one that should be closely watched is capacity utilization. This provides a measure of the slack in the economy for production. It is not a good measure of slack for the service sector which is the majority of economy, but does provide information on where there will be supply congestion. The capacity number may also be offset by excess capacity abroad, but it has generally been a good guide of potential inflation. If the economy is growing but the capacity utilization is below its peak, there will be a low probability that inflation will come from production constraints.
The current capacity utilization is near its all time highs since the last recession. There is the potential for greater price pressure as to moves closer to highs. It is currently at 81.7 with the high since the last recession being last year at 82.3. The average since 1972 has been 81. The mid-1990's numbers are generally higher than 82. It is not a good stand alone indicator, but it does provide added insight for where inflation may be heading. Given this number is high and growth has been good in the US, there is little likelihood that core inflation will ease in the near-term.
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