Inflation Tame--For Now

Jason Stipp: I'm Jason Stipp from Morningstar. The government released its inflation data on Wednesday and it showed that consumers had a little bit more wallet power in April with consumer prices dropping 0.1% month over month.

Here with me to give his reaction to the report is Morningstar's Bob Johnson. He's associate director of economic analysis. Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So the numbers in Wednesday's report were lower than a lot of people were expecting. What was behind that and did you find that surprising?

Johnson: Well, I was thinking we'd have a small increase in inflation this month. A positive tenth, instead we got a minus tenth. And clearly behind that was lower energy prices and flat prices in the housing market, which really drove the numbers.

Stipp: So, Bob, it seems like if prices are lower it's a good thing for consumers overall and their purchasing power. What are some of the economic benefits of seeing a mild inflation or even a slight deflation?

Johnson: One of the things that I look very carefully at is what is the real hourly wage? And that means wages adjusted for inflation and that's critical. It's been proven to be one of the better predictors of what consumers are actually going to spend in retail spending in the months ahead. So it's a very good predictor, and it's very sensitive.

So we've been through a period where we've had relatively flat wages, and for four or five months, we had inflation starting to come up a little bit. And I was getting a little worried. That real wage is pretty much flattened out.

And I'm glad to see that the inflation rate actually is down a little bit. Because it's going to put some money back in the consumer's pocket again. Lower gasoline prices give them the wherewithal to go spend money on other goods.

Stipp: But consumers are facing some higher costs in some areas you found in the report. So it's not like prices across the board went down. What did you see?

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Johnson: Right. And it's very fascinating. A lot of the times the numbers are just a bunch of mumbo jumbo, but there are a couple of clear patterns in the numbers.

One of the things was anything that's government related went up. And apparently in governments' attempt to recoup their budget losses, are raising prices to consumers. They're sticking it to the consumer.

We see it in many areas. Water bills, trash collection would be another. Kind of peripherally, education is related to state budgets in many cases. And all of those were up big. Public transportation was up 1.7%. That's not year-over-year or funny seasonal adjustments, that's one month's jump in public transportation. So governments are putting it to the consumer.

Stipp: They're waiting for some of that income tax revenue to pick up with the job market. They're going to try to squeeze some money out from some other areas.

So looking then, inflation was up 2.2% year over year.

Johnson: Correct.

Stipp: So looking that we did have a slight decrease in prices month over month, does this adjust or change what you were thinking for what we were going to have this year? And have you changed your thinking on that?

Johnson: Well, it certainly calls into question a little bit: I had 3% inflation December to December type of forecast. And so far in the first four months, we're probably up less than 1%. So it's going to be pretty hard to get to that 3% number frankly, and I'm going to have to revisit that in the weeks ahead.

And obviously faster U.S. growth was one of the key things in my forecast. We have gotten that. But, now rates have stayed lower than I expected. And now the strengthening of the dollar, of all things, is actually going to help control inflation in the months ahead. So those factors will probably cause me to revisit that number in the months ahead.

Stipp: Now looking at a little bit longer term. Even if you might moderate some of your expectations for inflation this year, you still do think this is going to be an issue that we're going to have to deal with? I mean, is it possible that we might just see a quick snap in inflation at some point?

Johnson: Oh, yeah. I think that these numbers are great and it's just the nature of how they're constructed; it's going to be hard for them to get bad in a couple of months. But that said, there are still things out there. I mean, commodity prices are still relatively elevated and you've got demand from emerging markets.

Emerging markets right now are still relatively strong. And if they create the demand for copper, we still have to pay that price. So that's certainly one thing that flows through the indexes. And just a lot of goods come from China in general and last week we saw pretty dramatic inflation, almost out of control inflation out of China. We're talking 2.2% year over year inflation in the [U.S.]. They're talking 2.8% month over month inflation. So clearly the inflation numbers are even beginning to scare the Chinese government.

And of course, we buy things from them and that slowly will come up through our food chain. So I'm still thinking in longer term I'm more worried about inflation than deflation. But in the short run, the news is certainly good.

Stipp: Well, Bob, thanks for your insights on the report on Wednesday and for your longer term outlook.

Johnson: Thank you.

Jason: For Morningstar I'm Jason Stipp, thanks for watching.