Two Reports, One Conclusion

We have two new pieces of economic data this morning, the CPI report and Industrial Production for July. The consumer price inflation report released this morning by the BLS showed a surprising fall in prices in July. Part of this was due to a small fallback in oil prices during the month (this will be undone in the August CPI report, since the price of oil has renewed its rise over the past couple of weeks), but part of it is due to the lack of price increases across the economy more generally. The core rate of inflation (i.e. excluding food and energy prices) was less than .1% in July. Here’s the picture:

The chart shows the overall consumer inflation rate, the consumer inflation rate for items other than food and energy, and the inflation rate for goods that businesses use. The rise in inflation that happened in the US during the first few months of 2004 definitely seems to be tapering off. As I’ve said before, this is both good and bad. It’s good for prices to stop rising if wages continue to rise, so that the real purchasing power of individuals increases. But it’s bad if this slowdown in price rises reflects weak demand, because that will in turn result in weak wage growth.

Meanwhile, the Industrial Production report for July showed a small gain in both production and capacity utilization that (almost) undid a decline in June.

Output by factories, mines, and utilities in the US is basically back to its level of 2000 (note that this is despite the fact that the rest of the economy has grown by about 9% over the period in real terms, and the population of the US has grown by

4-5%). Capacity utilization has yet to begin a serious recovery to pre-recession levels, however.

Both the capacity utilization figures and the slowing inflation figures are manifestations of the same phenomenon: the US economy is still operating far below its potential. And until demand picks up, below our potential is where we’ll stay.