By Dr. Philip Vinson
Assistant professor of economics, Georgia Gwinnett College
LAWRENCEVILLE, Ga. | While inflation has eased somewhat in April according to today’s Consumer Price Index Report, consumer prices continue to be elevated. That’s not good news for consumers who want to borrow money, or for the Federal Reserve, which will have tough decisions to make about interest rates.
Vinson
The Fed has signaled that they’d like to cut rates, but it’s hard for them to justify that if inflation continues to be stubborn. On the other hand, some business activity which has been on hold waiting for a rate cut may be canceled altogether if they don’t think the rate cut will happen after all.”
Inflation reflects the average increase in prices, but specific areas such as house prices, rent and services are the main drivers of inflation today. When those individual sectors see price increases, it drives the rate of inflation upward.
In the housing sector, the rate of price increases has leveled off, but demand remains high, especially in populous regions like the Atlanta metro area. Do not expect house prices to plummet anytime soon.
People have to live somewhere, and certain geographical locations are also the key to earning high incomes. New supply takes a long time to manifest. We will likely deal with a slightly higher-than-usual cost of living increase for a while because of housing alone.
The Federal Reserve is always balancing inflation with traditional measures of economic health, such as gross domestic product and unemployment. If these measures are strong, the Fed will address inflation. Should unemployment rise and economic indicators show the country moving toward recession, the Fed might move toward rate cuts.
One more consideration to make is that the Fed has already indicated that it would prefer to cut rates as soon as possible. The Fed’s credibility is incredibly important, so I would be surprised if they didn’t cut rates at all this year simply so that they can live up to their word. However, every disappointing inflation report reduces that likelihood.
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