There is probably some truth in the point that capacity is not as high as we think (made in the BIS annual report). Nonetheless, this only becomes a problem if the economy runs up against capacity limits. Given the deteriorating economic picture and lack of problematic wage growth, that does not appear to be an immediate issue, and there is thus no argument for immediate rate hikes.

Perhaps there is one important capacity constraint: oil. Finance takes less oil than proper production; to get back lost GDP with a smaller financial sector requires more oil. Yet as soon as we have a bit of growth, the oil price seems to rise. This is not a problem for inflation — the owners of oil do not spend their incomes in Wal-Mart, so rising nominal oil prices cannot be translated into rising nominal profits, unlike rising nominal wages — so there is not a risk of an oil-price spiral. The owners of oil do spend their money on financial and real assets, however. So in an economy that is constrained by the availability of oil, any growth should result in asset price inflation.

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