Capacity Utilization Rate Is Rising – Is Inflation Next?
A measure of an economy’s efficient use of its capital assets and labor force is the capacity utilization rate. This figure is released by the Federal Reserve each month and is closely watched for indications of a tight supply of resources, which can lead to higher labor and capital costs. As supply constraints develop, inflationary pressures can appear due to higher wages and operating expenses. Essentially, if market demand grows, capacity utilization will rise, if demand weakens, capacity utilization will slacken.
The financial markets can be directly influenced by capacity utilization rates, where increasing rates create inflationary pressures thus pushing bond yields higher. An increase in capacity utilization rates may also translate into more efficiently run companies, thus increasing equity valuations.
The most recent capacity utilization rates released by the Federal Reserve show the rate surpassing 78% for the first time since 2014. It is believed that when the utilization rate rises somewhere between 82% and 85%, companies are operating efficiently and productively allowing them to raise prices and increase margins, which eventually leads to overall price inflation.
Source: Federal Reserve
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