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By Jason Stipp | 11-17-2010 02:43 PM

Even in a Slow Economy, Inflation Can Still Strike

Even in the face of high unemployment, we could still see higher prices in the U.S., says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar. The great inflation-deflation debate got a little bit more data this week with a couple of government reports. Here with me to offer his take on the conversation and also what he saw in the reports is Morningstar's Bob Johnson, director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So we did get a couple of reports this week, the CPI and the Producer Price Index as well. Those are generally what people look at to see where is inflation--what kind of inflation do we face. What did you see in those reports?

Johnson: I really focused on the Consumer Price Index this week and the headline number was up a couple of tenths of a percent, which was a little better than people had hoped for. And I frankly like a low number, I mean that annualizes into about 2.4%, and I think it's a very good number.

What I'm very fearful of is if that inflation gets too high, and we've had relatively modest wage growth, that that takes away all the benefit from the little bit of wage growth that we've got. So, I'm not in the camp that's massively scared of low inflation or even a little bit of deflation.

Stipp: Now, you mentioned the headline number, another way that some economists will look at that number is the core number, so they will take out the volatile things like gas and food prices. The core number was actually pretty flat.

Johnson: Yes.

Stipp: There really wasn't any inflation at all. What do you make of that number as proof that we're not seeing any inflation and might see some deflation.

Johnson: Well, not only that, but it has been flat for three months. It's been 0.0 for three months in a row. So, the core number is ex-food and energy, and, you know, there is a certain logic to leaving those out; they are volatile, and they can be up and down in a given month.

But I am a very big believer in that you don't just willy-nilly leave them out of the calculations. I think they are important things--things that people cannot avoid buying, and so they're really the guts of inflation and what people are paying for, and it's what makes a difference about how optimistic people feel, and what they can spend on other goods in our economy, especially goods manufactured in our own country.

So, I think that's certainly more important to look at that headline number. Now, certainly, if you have a one-time refinery fire that makes it go up one month and by the time the report comes out, you already know the refinery has been fixed and you can do a manual adjustment. But just willy-nilly saying, "oh, well, energy doesn't count," it is ridiculous.

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