Is Statistics Canadas Measure an Appropriate Indicator of Inflationary Pressures?
Statistics Canada’s capacity utilization rate has traditionally been used, by policymakers and economic agents alike, as an indicator of future changes in inflation. Recently, however, domestic inflation pressures have remained subdued despite near record levels of capacity use. This raises the question of whether the link between high capacity utilization and inflation has been broken. This paper explores the issue econometrically by testing the stability over time of two alternative specifications a standard Phillips curve and one that incorporates changes in inflation regimes. Both specifications indicate that although there existed a positive and stable relationship between capacity use and inflation prior to the mid-1980s, this relationship breaks down after that time. Indeed, after 1986, econometric tests reject the hypothesis that capacity utilization rates can provide any information about changes in inflation.
