What nobody reports on is that capacity utilization, for the first time in many years, has gone above 80% in November 2014. History shows that once the 80% level is broken, inflation will most certainly follow.
Utilization
Inflation expectation is rising
The latest CPI numbers are out and we see that yoy inflation rates are now at 2%. I expect inflation to go higher in the future, because I see that the capacity utilization rate for May 2014 has been up to 79.1 for the total industry.
For mining, the capacity utilization rate even goes to 91, the highest in decades. I guess the mining industry is working at near full capacity and that’s good for commodities to go higher.
Remember, when the CPI goes up and bond yields drop, gold goes higher. And that’s exactly what is happening now. Bond yields are lower and CPI is higher.
Capacity Utilization Points to Higher Inflation
Capacity utilization rate is a leading indicator for inflation. And the latest number is at 79.2, a new record high since the bottom of the crisis. If history is an indicator, we should see huge inflation rates in a year from now.
The chart below points to a year over year CPI rate of 5% in the coming future. And we’re already half to that number as the latest consumer prices pointed to a 0.2% increase in prices in the month of March, or a 2.4% inflation rate per annum.
You can be sure that inflation is coming and you should prepare for that accordingly.
Capacity Utilization Rate Vs. Consumer Price Index
This page is created to monitor the Capacity Utilization Rate Vs. Consumer Price Index (CPI).
When capacity utilization goes above 80%, the industry goes above a threshold where it lacks capacity to produce. At that moment the only way to rebalance is to increase prices.
When the capacity utilization goes above 80% (blue chart), the CPI (red chart) will follow suit after 1 year as capacity utilization is a leading indicator for inflation.
Capacity Utilization Rate Vs. Unemployment
This page is created to monitor the Unemployment Rate Vs. Capacity Utilization Rate.
Historically, when the capacity utilization rate goes up (blue chart goes down), the unemployment rate goes down (red chart).
We also know that a high capacity utilization rate points towards inflation. Inflation points towards a higher CPI and a higher CPI means higher average hourly wages. Higher wages point to lower unemployment. And the circle is round.
The Trend in Base Metals based on Capacity Utilization and China Manufacturing PMI
To forecast the trend in the price of base metals we have a lot of indicators to look at. Two of the most important indicators to look at in my perspective are capacity utilization and the China manufacturing PMI.
Previously, I noticed that capacity utilization for mining in the U.S. was improving in November 2012, with the rate growing to 91.1%. Though, the problem is that the U.S. isn’t that important anymore when talking about commodities. For example, in 2012 the emerging markets account for 75% of global iron ore consumption (Chart 1), while Asia, South America and Oceania account for more than 70% of global iron ore production (Chart 2). The same trend can be found in gold and silver production/consumption.
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| Chart 1: Iron Ore Consumption by Continent |
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| Chart 2: Iron Ore Production by Continent |
It would be wrong to only look at the capacity utilization of the U.S. to draw any conclusions on the prospects in the commodity market. It’s essential to include China, South America and Australia/Canada into the equation.
To read the analysis, go here.
Capacity Utilization Continues to Improve in November 2012
We have good news, capacity utilization for the total industry improved in November 2012, from 77.7% the previous month to 78.4% this month.
What’s even better news is that capacity utilization for the mining industry went up to 91.1%, the highest for several years and above the historic average.
Utilities and manufacturing capacity utilization rates both went up significantly.
This information can be very important as it points to inflation.
For more information you can read my previous article on capacity utilization.
Capacity Utilization Rate Keeps Climbing in Canada, but not in the U.S.
In Canada the capacity utilization rate has climbed from 80.5% the previous quarter to 81%. As Canada is a resource based economy, this could be an indication that the commodities market will improve in the next quarters. Capacity utilization rates above 80% are inflationary.
U.S. capacity utilization took a dive in August 2012 to 78.2%, much less than the forecast. This is the lowest since October 2011 and a huge break of the trendline. We can’t make too much conclusions on this number because QE3 has just been announced and will have an effect on the future.
Capacity Utilization highest since April 2008
Good news for inflationists!
Capacity utilization for July 2012 came in at 79.3 (up from 78.9 a month ago), which is the highest number since April 2008. That also means we are nearing the danger zone of 80. Once we get above 80, you can bet that we will get high inflation after a few months from now.
All different industries were higher in capacity utilization with the mining industry posting an astounding 90.4 capacity utilization rate in July 2012, up from 89.5 a month ago.
There is absolutely no indication that precious metals won’t go higher in the future.
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| Chart 1: Capacity Utilization |
Capacity Utilization in June 2012 at 78.9%
Good news! The capacity utilization rate for the total industry in June 2012 came in at 78.9%, up from 78.7% a month ago (Chart 1).
Interestingly, the mining industry posted its biggest gain in capacity utilization. Mining had a capacity utilization of 89.4%, up from 89.0 % a month earlier.
So no worries, inflation is still in the game.
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| Chart 1: Capacity Utilization Rate |
Correlation Economics (Backup) 