Journal Article

The relationship between capacity utilization and inflation

Abstract: There's a common belief among economists that when there?s slack in the economy ? that is, when labor and capital are not fully employed ? the economy can expand without an increase in inflation. One measure of the intensity with which labor and capital are used in producing output is the capacity utilization rate. According to some economists, when capacity utilization is low, firms can increase employment and their use of capital without incurring large increases in the costs of production. So firms will not be forced to raise prices in order to make profits on additional output. But this theory is not universally accepted. In ?The Relationship Between Capacity Utilization and Inflation,? Mike Dotsey and Tom Stark investigate some of the problems with what, at first glance, seems a compelling story.

Keywords: Industrial capacity; Inflation (Finance);

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Business Review

Publication Date: 2005

Issue: Q2

Pages: 8-17