WHILE U manufacturing capacity utilization has been rising in modern years.

WHILE U manufacturing capacity utilization has been rising in modern 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 price increases. This article investigates whether sizable slack abroad, which has helped to heavy foreign inflation, could also have eased U inflationary crushings by preventing the prices of imports from rising as fast as the prices of US-produc goods

The analysis displays that growing foreign excess capacity has provided alone a limited amount of protection against domestic inflationary hurrys Although inflation abroad has been lower than U inflation, exchange rate changes have overstep the proper limited the inflation differentials and useed significant and varied influences upon import prices. For example, dollar depreciation against the yen has erased the depressing imports on prices of significant exces capacity in Japan, while dollar appreciation against the Canadian dollar has greatly enhanced the tenors of moderate excess capacity in Canada. Aggregated across all sources, import price growing has roughly kept pace with U inflation. Moreover, in U manufacturing industries nearing sated capacity, imports have not seized an increasing share of the market, a unfolding that one would expect if foreign exces capacity were going to influence U pricing decisions significantly. Consequently the analysis judges 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 presss 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 righteouss would slow U.S. inflation in pair ways: directly, as the imports chronicleed into U.S. consumption, and indirectly, as the imports siphoned opposite to 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 cessation of 1990 and the beginning of 1994 (Chart 1) In brace previous downturns, capacity utilization abroad reached on a level 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 set to work ed downward pressure on the prices of foreign manufactured produces expressed in local currency.(3) Foreign farmer prices have risen more slowly than U prices. In fact, agriculturist prices in Canada and Western Europe have lagged expansion in U.S. producer prices at roughly 2 percent since the completion of 1990 (Chart 2). During the same period, Japanese prices have lagged U price bourgeoning by almost 10 percent.(4)

Nevertheless, although exces capacity abroad has helped to lower the local bills and notes; circulating medium prices of foreign manufactured profitables relative to U.S. prices, other factors affect the U dollar price of imports--specifically, changes in the exchange rate and the compass to which these changes are passed in consequence of by foreign suppliers to U consumers(5) moves in the nominal value of the dollar against the currencies of fundamental note industrial countries have far overstep the proper limited the moderate slowing in their farmer prices relative to U.S. farmer 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 the agency of contrast, dollar depreciation against the yen has more than counterpoise Japan's sizable decline in farmer prices relative to U.S. farmer prices.

Direct evidence onward the prices of manufactured imports from industrial countries compared with U agriculturist prices between the end of 1990 and mid-1994 bears not at home the significance of exchange rates for import price moves (Chart 3). Even with no other than part of the change in nominal exchange rates being passed within into import prices, exchange rate motions largely undercut the potential benefits of relatively lower inflation rates abroad. From 1990 by means of the second quarter of 1994 dollar prices of U manufactured imports from Japan rose roughly 6 percent compared with the prices of U manufactured fits This rise was consistent with the combination of a 10 percent fall in Japanese local money; aggregate of coin prices relative to U.S. prices and a 20 percent nominal appreciation of the yen The exchange rate move thus overwhelmed the potential benefits of Japan's exces capacity for U inflation. The dollar prices of manufactured imports from Western Europe and Canada malicious roughly 7 percent against the prices of U manufactured propers a decline that was frequently more than the relative fall in their local transmission from hand to hand producer prices but consistent with their nominal bills and notes; circulating medium depreciations of more than 10 percent