Capacity utilization is driven by demand.

This orange line represents capacity utilization.

Low utilization, prices will decrease.

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.

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

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.

Low utilization, you have kind of the opposite situation.

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

So you have the situation now, where you have low utilization.

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

That when you have low utilization, it's everyone's incentive to lower prices.

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.

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.

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

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

On the other hand, low utilization let me pick another color will lead the prices dropping.

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.

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.

Filesystem Utilization Viewer

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.

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

Capacity

Capacity

Capacity

Capacity

So over here, you say, OK, when inflation really started turning around, we were at a capacity utilization of roughly 83 , 84 right there.

So up here this is 90 utilization and then down here this is 70 utilization.

But when you have very low utilization, you essentially want to lower your prices so that you can utilize your factory more.

But this orange I'll do it the same color, this orange shows capacity utilization, and the starting date right here, I think it was 1967.

He's only running at 25 utilization.

Used Capacity

And then, when you have that extra capacity, everyone's incentive is really to lower prices so that they can try to grab some of that utilization.

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 this is just our capacity, our productive capacity.

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.

Server at capacity