Solid Blue Cities Hit Hardest By Inflation

With the year-over-year inflation rate at 2.5% in August, the personal-finance website WalletHub today released its updated report on the Changes in Inflation by City, as well as expert commentary.

To determine how inflation is impacting people in different cities, WalletHub compared 23 major MSAs (Metropolitan Statistical Areas) across two key metrics involving the Consumer Price Index, which measures inflation. We compared the Consumer Price Index for the latest month for which BLS data is available to two months prior and one year prior to get a snapshot of how inflation has changed in the short and long term.

To view the full report and your city’s rank, please visit:
https://wallethub.com/edu/cities-inflation/107537

Key takeaways and WalletHub commentary are included below in text and video format

Expert Commentary

What are the main factors currently driving inflation? 

“Nationwide impacts like supply chain issues and interest rate expectations are still present, but housing prices seem to be a significant driver of price differentials among cities. Historically, housing accounts for about one-third of the CPI, which is likely causing some of the differentials observed in this document. Just looking at the year-over-year numbers, it is hard to determine much, except that NYC and some other cities are probably still not allowing enough housing to be built. Dallas is hard to assess because the DFW economy is booming (in growth terms, anyway) relative to these other cities.”
Malcom Kass – Assistant Professor, University of Dallas

“In recent years, failed governmental policies have been the primary contributors to inflation in the United States. The urgency of this issue cannot be overstated, as the federal government’s excessive monetary injection to mitigate the pandemic’s financial impact, coupled with a decrease in the workforce, has led to significant challenges in the manufacturing and delivery of goods, particularly services. American businesses’ loss of control over the distribution of goods due to an overreliance on other nations for energy has resulted in inflated gas prices. Despite the apparent shrinkage of inflation’s effects, it remains a critical issue affecting most American families. The long-term consequences of inflation, such as reduced purchasing power and increased cost of living, are particularly detrimental to low-income families, making it a pressing issue that demands immediate attention.”
Wayne Hochwarter – Professor, Florida State University; Distinguished Scholar and Honorary Research Professor, United Arab Emirates University

Is raising interest rates a good or bad solution to control inflation?

“I believe it is a great solution for a country like the USA. The USA is a large economy where businesses and consumers are sensitive to interest rate changes. Raising the interest rate does reduce spending and investment, causing demand shifts that reduce inflation. Obviously, no policy is without its downsides; raising interest rates does impact the government’s ability to service its debt, can decrease non-farm payroll (i.e., jobs), causing higher levels of unemployment, and if interest rates are raised too much, can drive the economy into a recession. Also, coming out of COVID, where part of the short-term inflation was driven by supply-side issues such as supply-chain disruptions, higher interest rates do not necessarily solve such issues and at worst can exacerbate them.”
M. Saif Mehkari – Associate Professor, University of Richmond

“When the central bank increases interest rates, borrowing becomes more expensive. Consumers and businesses might think twice about taking out loans for major purchases or investments in this environment. This slows down spending, typically lowering overall demand and hopefully reducing inflation. However, not all that glitters. When companies cease their investments in people, facilities, and opportunities, it triggers a complex web of effects on the price of goods, product availability, employment expansion, and wage growth. As seen in the construction sector, this decline in investment adversely impacts material purchases, permitting revenues, and hiring/wage growth, thereby influencing future economic development. This interconnectedness of economic factors underscores the complexity of financial systems and the need for comprehensive planning when implementing inflation control measures.”
Wayne Hochwarter – Professor, Florida State University; Distinguished Scholar and Honorary Research Professor, United Arab Emirates University

What does the current inflation rate tell us about the future of the economy?

“Inflation has been steadily falling and is now much closer to the long-run 2% target. This tells us that we have been successful in reining in the high inflation rates we have seen in the past few years. The next question is twofold: (1) Can we bring inflation back to a steady level fluctuating around 2% without hurting the labor market too much more? (2) When is it appropriate to start reducing interest rates? Too early, and we risk inflation rising again, causing the need for another round of interest rate increases (similar to the 1980s). Too late, and inflation might fall too much, and unemployment might rise too much. For now, I believe the future of the economy looks good, but the next few months are going to be crucial to implementing, hopefully, a soft landing. It is important to note that while inflation is falling, the high prices that have resulted from inflation in the past few years are here to stay. The slowing down of inflation just tells us that prices are not going to continue to rise rapidly. In the long run, the hope is that there is a broad increase in income across sectors and income groups to offset the permanently higher prices. Such a broad increase should eventually cause a reversal in any erosion in standards of living that certain sectors and income groups have experienced in the past few years due to the rising inflation.”
M. Saif Mehkari – Associate Professor, University of Richmond