Get Ready: Here Comes The Revenge Of "Stagflation"

This morning’s capacity utilization data from The Fed shows that the slowly the slack is being wrung out of the system.

The system is still a long way from being “tight” but eventually this will force the Fed’s hand, and a raising of interest rates could end up coming sooner than many expect. (The consensus seems to be that there won’t be any rate hike this year, and maybe not until late 2011).

The ultimate goal, of course, is to get the economy humming again, and obviously increased capacity utilization is great news.

But the nightmare is if that happens, and employment doesn’t follow suit. Then the Fed has a dilemma, and a legitimate challenge balancing price inflation with full employment.

Thus if we get a few more months on trend, the stagflation story could come back with a vengeance.

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