Food and energy prices are highly variable from month to month, and are liable to make month-to-month changes in the CPI jump around quite a bit. For this reason, economists examine how the CPI behaves when these two components are excluded. For June, the CPI minus food and energy rose 0.2 percent.

Another way to minimize the month-to-month variations in the CPI is to look at the changes in the index over a longer period of time, usually a year. For the year ending with June 1996, the CPI rose by 2.8 percent. For the same period the CPI minus food and energy rose 2.7 percent. Thus, you can see how the longer period tends to bring these two quantities closer together.

The June year-over-year change of 2.8 percent in the CPI compares with a rate of 2.5 percent in 1995 and a rate 2.7 percent in both 1994 and 1993. Since 1991 the yearly CPI change has been virtually constant, varying between 2.5 and 3.5 percent. The June reading is right in the middle of this range. June marked the 66th consecutive month of low, essentially constant, CPI growth. The last period comparable to this was 30 years ago.

~~~~~~~~~~~~~~~~~~~~

This morning the Federal Reserve released its June report on Industrial Production and Capacity Utilization.

The Fed's Index of Industrial Production measures the output of the nation's factories, utilities, mines, and oil and gas wells. Over the years, the Index has proven to be a reliable measure of the current state of the overall economy. It is one of the four indicators that the Department of Commerce uses in generating its monthly Composite Index of Coincident Economic Indicators.

Industrial production advanced 0.5 percent in June. This followed a revised advance of 0.5 percent in May and a gain of 0.7 percent in April. For the year ending in June, the index was up 3.5 percent. The index rose at annualized rates of 3.0 percent and 5.6 percent in the first and second quarters of 1996. No doubt about it, we're in an economic expansion

~~~~~~~~~~~~~~~~~~~~

In today's release, the Fed also reported on industrial capacity utilization for June. Capacity Utilization measures the percentage of the nation's productive capacity that was employed during the month. From May to June this indicator rose 0.1 percent to a value of 83.2 percent.

In January of 1995, capacity utilization hit a peak of 85.1 percent. Between then and December 1995, the indicator declined steadily to a reading of 82.1. The January-through-June readings, as presented in today's report, were 82.4, 83.3, 82.6, 82.9, 83.1 and 83.2. So, for the past three months, capacity utilization has been edging upward. But, the level has not yet exceeded the 83.3 reading set in February.

History has shown that capacity utilization and the unemployment rate are inversely related to one another. When economic activity expands, capacity utilization and employment expand, and the unemployment rate goes down. When economic activity contracts, the opposite is true.

In the most-recent Employment Situation report the unemployment rate was reported as 5.3 percent. Economists regard an unemployment rate of about 5.5 percent as the "full employment" unemployment rate.

Over the past six months the economy has been expanding. This has driven the unemployment rate to 0.2 percent below the level that is generally regarded as the minimum practicably-attainable level. At the same time, capacity utilization has been slow to rise. Thus, it seems that the present expansion may be limited because all the workers are already employed. The fact that capacity utilization has not leaped upward during recent months seems to confirm this conclusion.

Byline: Lafferty (MF Merlin)