Commentaries

Prophets of inflationary doom have long been clutching at statistical straws. It becomes clearer with each official release that inflation clouds are not even visible on the distant horizon. Inflation fear mongers seem motivated more by an ideological aversion to decisive government action – particularly the Federal Reserve’s ballooning balance sheet.

The spare capacity of US industry has now reached a 40-year high. Companies are churning out just 68.3 percent of their potential output. To put this in perspective, the average capacity utilization between 1972 and 2008 was 80.9 percent. In a data series stretching back to 1967 the figures have never been lower. Clearly American industry has huge amounts of slack to deploy when the recovery comes. With unemployment at 9.4 percent, companies will also have a huge pool of workers to draw upon before they start bidding up the price of labor. This will give policy makers plenty of time to withdraw their stimulus before inflation becomes a problem.

Nor are the money supply figures as alarming as inflation hawks have argued. Arthur Laffer’s piece in the Wall Street Journal – which is linked above – focused on the explosive growth of M1. The latest figures show M1 – mainly cash and checking accounts - up 16.2 percent over the year to May. Americans seem keen to keep plenty of cash on hand as the economy tanks. But broader money supply growth has been reassuringly sedate. M3 – which includes slightly less liquid assets such as time deposits – is growing at below 4 percent on a three-month annualized basis, according to Capital Economics.  The velocity of circulation also appears to have slowed abruptly and bank lending has been edging lower.

We now have to wait and see how the consumer price index turns out tomorrow.