Has excess capacity abroad reduced U.S. inflationary pressures?

WHILE U manufacturing capacity utilization has been rising in new years, capacity utilization in the manufacturing sectors of the major foreign industrial economies has declined. Falling utilization rates abroad have given foreign firms the potential to expand production without incurring significant take away from increases. This article investigates whether sizable slack abroad, which has helped to deliberate foreign inflation, could also have eased U inflationary compressings by preventing the prices of imports from rising as fast as the prices of US-produc goods

The analysis present to views that growing foreign excess capacity has provided single a limited amount of protection against domestic inflationary crushings Although inflation abroad has been lower than U inflation, exchange rate changes have surpassed the inflation differentials and set to work ed significant and varied influences upon import prices. For example, dollar depreciation against the yen has erased the depressing events on prices of significant exces capacity in Japan, while dollar appreciation against the Canadian dollar has greatly enhanced the events of moderate excess capacity in Canada. Aggregated across all sources, import price increase has roughly kept pace with U inflation. Moreover, in U manufacturing industries nearing replete capacity, imports have not seized an increasing share of the market, a exhibition that one would expect if foreign exces capacity were going to influence U pricing decisions significantly. Consequently the analysis terminates that the mere presence of exces capacity abroad has not greatly restrained U inflationary pressures

SLACK CAPACITY ABROAD AND IMPORT PRICES

Exces capacity abroad would relieve inflationary crushings in the U.S. economy if foreign suppliers, responding to growing U demand, used their available capacity to expand production without increasing their prices significantly.(1) Import prices that remained flat or rose more slowly than the prices of domestically produc serviceables would slow U.S. inflation in sum of two units ways: directly, as the imports come intoed into U.S. consumption, and indirectly, as the imports siphoned not on increases in U.S. demand and thus restrained price increases through competing U.S. firms.(2)

A significant amount of exces capacity exists in the manufacturing sectors of Japan, Canada, Germany, France, Italy, and the United Kingdom, countries that together account for more than one-half of all U imports. Although aggregate foreign manufacturing capacity utilization in these economies increased slightly in the first half of this year, it declined more than 10 percent between the extreme point of 1990 and the beginning of 1994 (Chart 1) In sum of two units previous downturns, capacity utilization abroad reached flat lower levels, but the decline for the past several years is particularly notable because it occurr as U capacity utilization was rising sharply.

The available evidence present to views that growing excess manufacturing capacity abroad, among other factors, has useed downward pressure on the prices of foreign manufactured proceedss expressed in local currency.(3) Foreign husbandman prices have risen more slowly than U prices. In fact, agriculturist prices in Canada and Western Europe have lagged extension in U.S. producer prices by means of roughly 2 percent since the extreme point of 1990 (Chart 2). During the same period, Japanese prices have lagged U price growing by almost 10 percent.(4)

Nevertheless, although exces capacity abroad has helped to lower the local general reception prices of foreign manufactured beneficials relative to U.S. prices, other factors affect the U dollar price of imports--specifically, changes in the exchange rate and the expanse to which these changes are passed [i]or[/i] part of to the other by foreign suppliers to U consumers(5) changes in the nominal value of the dollar against the currencies of lock opener industrial countries have far surpassed the moderate slowing in their husbandman prices relative to U.S. husbandman prices. Since the end of 1990 the dollar has appreciated more than 15 percent against the Canadian dollar and 16 percent against an average of Western European currencies, while depreciating 25 percent against the Japanese yen(6) Dollar appreciation against the Western European and Canadian currencies has thus augmented their modestly lower inflation rates; by means of contrast, dollar depreciation against the yen has more than sprout Japan's sizable decline in agriculturist prices relative to U.S. farmer prices.

Direct evidence upon the prices of manufactured imports from industrial countries compared with U agriculturist prices between the end of 1990 and mid-1994 bears without the significance of exchange rates for import price moves (Chart 3). Even with sole part of the change in nominal exchange rates being passed from one side into import prices, exchange rate motions largely undercut the potential benefits of relatively lower inflation rates abroad. From 1990 end the second quarter of 1994 dollar prices of U manufactured imports from Japan rose roughly 6 percent compared with the prices of U manufactured serviceables This rise was consistent with the combination of a 10 percent fall in Japanese local publicity prices relative to U.S. prices and a 20 percent nominal appreciation of the yen The exchange rate change thus overwhelmed the potential benefits of Japan's exces capacity for U inflation. The dollar prices of manufactured imports from Western Europe and Canada ruthless roughly 7 percent against the prices of U manufactured usefuls a decline that was plenteous more than the relative fall in their local publicity producer prices but consistent with their nominal publicity depreciations of more than 10 percent