With the year-over-year inflation rate at 3% in June, a new report on the Cities Where Inflation is Rising the Most gives insight for those experiencing the ups and downs of the U.S. economy.

Comparisons

To determine the cities where inflation is rising the most – and thus is the biggest problem – 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 two months prior and one year before to get a snapshot of how inflation has changed in the short and long term.

Rising the MostRising the Least
1. Tampa, FL19. Minneapolis, MN
2. Atlanta, GA20. Baltimore, MD
3. Detroit, MI21. Honolulu, HI
4. St. Louis, MO22. Boston, MA
5. Seattle, WA23. Anchorage, AK

Main Factors Driving Inflation

“Coming out of the pandemic, inflation was fueled initially by supply chain backlogs. A second wave kicked in as a result of Russia’s invasion of Ukraine, causing worldwide shortfalls in food and energy. The latest round of inflation appears to be driven by tight labor markets, especially in the service sector, and by high demand for travel and hospitality,” said Curtis R. Taylor, a professor at Duke University.

“As always, prices are jointly determined by demand and supply in the market. In the early stages of the pandemic, various supply-chain disruptions were undercutting the quantity of goods and services for sale, and certain expenditures (think travel/leisure/sports/concerts/restaurants) were harder to consume safely, so the prices of durable goods exploded. As public health and safety concerns started to wane, production levels slowly came back to normal. Now, employment levels are back above 2019 numbers, and nearly back to the long-run trend, so constrained supply is not the main problem right now. Instead, demand continues to be strong because wages continue to rise. Nominal hourly wages in the US are up 20% since May 2019 according to BLS data. Yes, nearly all of that has been eaten up by inflation – but the bottom line is that consumers still have strong purchasing power. The best-case scenario over the next 12-18 months is that inflation levels continue falling slowly, and unemployment rates hold steady, or perhaps move up a tad (but stay below 4%). If that happens, I see the inflation problem as being largely dealt with by summer 2024 – and I am sure that is a scenario the Fed would love to see play out. The worst-case scenario is that unemployment starts to become a bigger problem, and the Fed has to react by cutting rates – which could potentially give inflation a bit of new life. I think that is unlikely, but certainly possible,” said Gregory S. Burge, chair and professor of economics at the University of Oklahoma.

Raising Interest Rates: Good or Bad

“Raising interest rates is the only solution to controlling inflation. Raising interest rates reflects the Fed’s change in its balance sheet. If the Fed wishes to reduce inflation, it needs to reduce the money supply, which it does by reducing its balance sheet and contracting reserves held by banks, which, in turn, raises the interest rate,” Coleman added.

“Raising rates is a blunt instrument for curbing demand, no doubt, but it is about the only instrument the Federal Reserve has. Congress could raise taxes to reduce demand (and reduce the deficit at the same time), but that is a political pipe dream these days,” Taylor added.

Meaning of Current Inflation Rate

“Inflation is not yet under control. While it has fallen from its high of 8.9 percent year-over-year in June 2022 to 3 percent in June 2023, it is still not close to the Fed’s long-term goal of 2 percent. The Fed will have to be persistent in reducing inflation, which will likely involve more rate hikes over the next year or so. Of course, if the economy enters into a recession, the Fed will have to throw caution to the wind and lower rates, but this will just kick the can down the road, and the Fed will have to resume controlling an even worse inflation problem during the next recovery,” Coleman said.

To view the full report and your city’s rank, please visit here.

Source: WalletHub