So high utilization of capacity, it leads to prices increasing.

Capacity utilization is driven by demand.

This orange line represents capacity utilization.

And capacity utilization had really preceded that.

My answer is, just watch the capacity utilization numbers.

Capacity utilization drives inflation. We can all buy that.

High Capacity Black Cartridge

High Capacity Color Cartridge

So we're all tapped out, we're at 100 capacity utilization.

And the traditional notion of capacity utilization, and this is what my brain does when someone mentions it, is I think of industrial capacity utilization.

And notice, it was preceded by an uptick in capacity utilization.

And if you go a little bit lower, it tells me capacity utilization.

So those are the two side effects of high utilization.

And the inflation really started going once capacity utilization got into the 80 range.

As we said in the last video, the orange line is U.S. capacity utilization.

So this is more recent, where we see that capacity utilization started falling off.

And that's the real big take away I wanted you to get at, is that high utilization of anything, of our aggregate capacity, prices will increase.

But the interesting thing, just falling into the cupcake economics and this whole notion of capacity utilization, is that inflationary periods are always preceded, at least all the data I have, by increases in capacity utilization.

And you'll have very high utilization of all of the capacity in the island and you might have inflation, even though the money supply is one seashell.

And, likewise, if you have very high utilization, it's hard to avoid inflation.

But, in general, prices will go up when you have high utilization, right?

So the point I want to make here is capacity utilization really is the driver of inflation.

High capacity transportation means spending lots and lots of money.

And going back to where we started this video, in terms of capacity utilization and what that might do to prices, this tells us that labor utilization is

Filesystem Utilization Viewer

These are our two major bouts of inflation, in the early 70's and in the early 80's, and those were when we had extremely high capacity utilization.

And won't the wholesale printing of money drive demand to go up, and then we'll have very high capacity utilization, and then we'll have inflation or even hyper inflation?

So, if you saw right here, wow, capacity utilization is starting to go up and actually, another interesting thing is to see what threshold of utilization starts to trigger inflation.

It isn't so much the money supply, although the money supply will have an effect, it's really capacity utilization.

So that dynamic that we've been talking about, capacity utilization falling off, because we essentially had a demand shock.

So if we look here, in the late 60's, we have very high utilization.

Actually, I'll throw another thing in here that's a little unrelated to inflation, but high utilization makes prices go up and it also makes people want to add more capacity, right?

This idea is particularly powerful for things that have high idling capacity.

I've done a bunch of videos now on inflation and deflation and how they can be impacted by capacity utilization.

And if you think about it, industrial capacity utilization, it matters, but it matters much more to manufacturing based economy.

But, when you're at a relatively high utilization, it really pays to increase your price hurdle.

Capacity

Capacity

Capacity

Capacity

A couple of days ago, I made these videos on cupcake economics, where I talked about what happens when the cupcake factories have high utilization or low utilization.

And when people say low utilization, I imagine idle factories, and when high utilization, I imagine factories that are running at three shifts and things are moving feverishly.

So the orange line is utilization. Up here we had like 90 utilization.

Low utilization, prices will decrease.

Used Capacity