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By Jason Stipp | 07-13-2011 11:28 AM

Is Inflation Hot Enough to Burn?

Recent levels of inflation bumped up against the danger zone but should cool off over the next several months, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar.

As part of our inflation special report, we're checking in today with Morningstar's Bob Johnson, director of economic analysis, to put today's inflation rate into some context and offer his advice on where inflation might be going for the rest of the year and even looking forward from that.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: First question for you, when we look at where we are with inflation right now--and we did see some inflation start to heat up earlier in the spring--can you put that into some context? How bad was the inflation that we saw compared to what we have seen historically over the last several decades?

Johnson: Well, actually the number was fairly close to the long-term average, right now we're running at about 3.4% inflation looking year-over-year; that is comparing this May with last May, which is the last set of data we had. We're up about 3.4%, and the historical average is about 3.5%--measuring from 1947 through the current time. So we're running pretty close to what I'd call normal.

Stipp: Now, when people think about inflation, a lot of folks will think back to the 1970s-1980s time. How does that 3.5%-3.4% number compared to the inflation that we saw during that high inflation period?

Johnson: Well, that's a very interesting theme, because I did say the average, it was in mid 3%s, but a lot of that was driven by the period from 1970 through 1982, when ... oil prices tripled very quickly and when we had a very inflationary wartime type of economy going on, and we really got inflation spiking up there.

So if you take that one period, ... from 1970 to 1982, where inflation didn't drop below 4%. So, that really inflates the overall period.

Stipp: So, when you take that period out and look at the inflation rate, would you say that we're a little bit on the high side then at the 3.4%?

Johnson: I'd say the 3.4% is a little high. I think we need to be somewhere in the 2%-3% range to be what I'd call normal. So, we're clearly running ahead of that, I think driven a lot by food and energy.

Stipp: So, let's talk a little bit about what some of forces are that are affecting inflation today.

There seem to be some countervailing forces. So, on one side we still have a high unemployment and what a lot of folks would say is slack capacity out there in the economy, which would tend to keep a lid on inflation.

Yet we also saw inflation begin to spike. So, on the side that's keeping inflation down, what are some of those factors and how effective have they been at keeping inflation from being even higher?

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