EU Capacity utilization

productive capacity & inflationary pressures

is EU productive capacity usage causing inflation?

Capacity utilization in EU:

• is at 77.8%, low, in the bottom range of 10-year observations
• has been trending down in the quarter (-0.1)%
• remains below the limit that indicates hot production activity

In summary:
Capacity utilization is limited and declining, and remains below the historical limit that anticipates emerging inflation pressures.

IntroCapacity utilization rate measures the percentage of an organization/region's potential productive output (for both goods and services) that is actually being realized. The capacity utilization rate of a national/regional economy (or a company) is measured to provide an insight into how well it is reaching its maximum productive potential.

In other words and for our purposes, capacity utilization indicates the slack in an economy at a given point in time. Higher capacity utilization runs in periods of economic expansion to meet up with rising demand, while it drops in downturns and demand fades.

Economic implicationsRising demand will normally bring higher production operating rates, pushing for higher wages and rising producer prices, ultimately landing into higher final consumer prices (=inflation). It has been demonstrated that higher capacity utilization (above 80%) has marginal predictive power for inflation, and price changes connected to manufacturing increases ten to be sizeable.

EU Energy inflation

reviewing a non-core, volatile inflation component

how much is energy adding to EU inflation?

Energy inflation:

• the latest reading is -0.2% YoY, moderate, in the lower range of 10-year observations
• it has gone down by -0.14% since last month

What does it mean:

• Energy inflation is in the bottom of the range, contributing (as non - core element) to bring inflation down.

IntroThis chart focuses on energy inflation, defined as the price change of a basket of energy commodities such as crude oil, heating oil, natural gas, and gasoline.

Non-core itemsThe prices of energy commodities tend to be more volatile than the ones from other goods and services. This is why energy items (together with food items) are excluded from the core inflation basket, which offers a more stable view of the long-term trend in prices. Nonetheless, energy inflation is key to monitor as its weight on headline inflation is significant at around 10%.

Chart guide & economic implicationsIn this chart we can monitor sudden fluctations in energy prices and their potentially abnormal impact on inflation numbers. If energy price fluctuations are justified by specific, short-lived technical or macro episodes (from short-term supply gluts to inventory drawdowns or geopolitical tensions) we can safely dismiss any long-term influence on inflation, especially if on the way up. If instead energy price changes are part of a broader, clearer inflation upswing...well, then there's trouble coming.