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By Robert Johnson, CFA and Jeremy Glaser | 07-23-2014 11:00 AM

Johnson: Inflation No Major Cause for Concern Today

Although inflation has ticked up from 2013 levels, it remains below its historical average and a long way from a worrisome level, says Morningstar's Bob Johnson.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. With rising prices at the grocery store and also at the gas pump, many consumers are beginning to become worried about inflation. I'm here today with Bob Johnson--he's our director of economic analysis--to take a look at what's happening with inflation and if there really is cause for concern. Bob, thanks for joining me today.

Bob Johnson: Great to be here today.

Glaser: So what is the current state of inflation data today? Just how much are price levels rising?

Johnson: Overall, the inflation rate has ticked up a little bit year-over-year, which is the best way to look at it. It's up about 2.1% this June compared with June a year ago. The 60-year average on that number is about 4.1%. The median is more like 3.1%. So, we're certainly below what the normal metrics are, but we're quite a bit above where we last October or November when we got down to inflation rates of about 1% year over year. So, we've ticked back up again.

Glaser: So, what's driving that increase?

Johnson: It's very interesting what has happened, especially with the recent data. We've talked again and again about the droughts in Texas and California and Brazil driving up different food products. Now the drought has broken in some places, but it takes a long time for food to wind through the food chain. It starts with corn and soybeans--the basic feedstock--and you get chicken prices coming down first because of their short lifecycle. [It takes] closer to a year with pork [prices] and almost two years with beef. So, clearly we've had some better news on the drought, but it's going to take a while to entirely work through the system. That said, the food prices were the best part of the June report. They're only up 0.1% after being up 0.4% or 0.5% a couple of months in a row. Food is an important part of the index, and it's the highly visible one. The consumer feels bad when he has to pay a lot more for a steak or a pound of bacon or a quart of milk. It's visible. Also, the price of gas. Those make people feel uncomfortable even though they aren't necessarily a huge portion of the CPI [Consumer Price Index] number.

Glaser: How about gas then?

Johnson: Gas was a very interesting number in this survey. It was probably the biggest negative in the report. On a month-to-month basis, [the index] was up 0.3%. Gasoline was up 0.15% or half of the monthly increase. But the odd thing is that gas prices didn't go up at all at the pump. It was the old seasonal-adjustment factor again. Prices usually come down in June, and so they do their seasonal-adjustment factor. So, even though prices were exactly flat month to month, when they added in the seasonal-adjustment factor, it looked like prices were up 3.3%. If you take that at a 5% weight, that's how you get to 0.15%, which is a pretty healthy number. So, that was the biggest negative in the report. Another big negative in the report was that [drug prices] were up big again. They were up 0.5% in May and 0.7% in June. After a really quiet year in 2013--no price inflation in drugs--they are really on a tear this year.

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