Examining the Relationship Between Capacity Utilization and Inflation

Abstract

This paper provides insight into the complex relationship between capacity utilization and inflation in the U.S. economy. We test various current and expected inflation rates in separate models to examine the strength of relationship between capacity utilization and inflation from 1984-2018. We find the relationship between current inflation and capacity utilization has continued to weaken over time. Long run expected inflation and capacity utilization, however, have the strongest relationship, with changes in expected inflation having larger impact on utilization rates since 2000. These results suggest more emphasis should be placed on the relationship between capacity utilization and expected future inflation.