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The economy's not slack across the board, says Morningstar's Bob Johnson. Some areas could see inflation sooner than others.

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The Prospects of Inflation Jason Stipp: I'm Jason Stipp from Morningstar. The Fed held its very low rate steady this week, and the CPI data showed inflation continuing to be benign. But how long can this trend keep going? Here with me to dig into the details is Morningstar's Bob Johnson. He's associate director of economic analysis. Thanks for joining me, Bob. Bob Johnson: Great to be here. Jason Stipp: So why has inflation been so tame, and why has the Fed been able to keep those rates so low for so long? Bob Johnson: Sure. I think a part of it--and let's look at the numbers. Last month, the month-over-month inflation rate was right at zero. So it was flat on a month-to-month basis. You look a little longer term, year over year, and it was about 2.1%. Those are both low numbers, and certainly what's been helping on some fronts is energy prices have really held steady and come back from their highs. That's what's helped over the intermediate term here. And in the short run, what's really helped keep things down is the housing component, which is as much as a third of the index. And that's based on either what you're paying out in rents or something that's related to the value of your home and how that equates to rents. What that number is right now is pretty flat, and it probably will be for some time given some of the vacancy numbers that are out there. And so that's put a little bit of a lid on the numbers, but you look at individual categories, and what people lay out in cash day to day, there's some numbers that are still a little high there, and I don't think we can ignore those completely. Jason Stipp: Sure. Now the Fed has said, and it says again and again and again, that this accommodative policy is going to have to be in effect for quite awhile. It seems to imply that the Fed doesn't think inflation is going to be a big problem for at least a little while, at least in the short to intermediate term. Bob Johnson: Yeah. Jason Stipp: What are folks saying about whether this trend of benign inflation can last? What are they pointing to that says, "Oh, we're not going to see inflation for awhile?" Bob Johnson: Sure. I think the best arguments for deflation or very, very limited inflation, is, look at the unemployment rate. It's sky high and that's a source of labor. If that's plentiful, then how can prices go up? And the same thing with the industrial capacity down in the 70% range, when you've got all that slack capacity, how can anybody think about rising prices? But there is something wrong with that argument in my mind. I think it misses that there are parts of the economy that are very loose, construction in California, and there are other things that are very tight, web designers in New York. And so I think you've got to be careful that not everything has got a ton of slack capacity to it. And I think that's where people are missing it. That you'll have some items that, yes, will face continued deflation, but other items that may be higher. Jason Stipp: So to say across the board--you can't really say, "Oh, we're going to see one trend here." If demand picks up in a certain area that's already tight, you could see prices spike up in that area, for example. Bob Johnson: Exactly. Very weird things, but even used car prices year over year are up almost 15%, because there weren't many new cars. And so the demand for the used cars went up, and so the prices were up 15% year over year on used cars. Who would have suspected something like that? Medical care is perpetually high. I think it was up five-tenths of a percent last month. So, there are things that go up, and there are things that go down. I'm not saying we're going to have runaway inflation, but we're not going to have runaway deflation, either. Jason Stipp: OK, so speaking of your expectations, what are you thinking in the short term that we might possibly see over the next few months, and then what are some of your longer expectations for inflation? Bob Johnson: Sure. I think the housing component of it, which is a meaningful component, will stay relatively low for some period of time here. And so that's going to keep a little bit of a lid on things in the very short run. But on the other hand, I think if you look at the energy prices, I think the prices at the pumps are really up a lot in the last week. And so I think that's going to have some impact on the numbers. So I think maybe on the month to month, we may have seen a little bit of a lull here at that zero. It's going to be higher next month. And I think as we look through the rest of the year, that it will probably be somewhere in the2% to 3% range. I'm probably a little bit more at 3%, because I think the economy is growing faster than people think. And we'll hit constraints in some parts of the economy before people suspect. We can already see some manufacturing categories saying, "Gee, prices are a lot higher than I thought" and so that's going to move things along a little bit. Jason Stipp: Well Bob, thanks for the context in that. Stripping it back and looking into the details is very helpful. Bob Johnson: Great. Jason Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.