Changes In Inflation By City

Year-over-year inflation rate hits 3.7% in August 2023

The U.S. inflation rate hit a 40-year high last year, but has since slowed down significantly due to factors like the Federal Reserve rate hikes. The year-over-year inflation rate was still 3.7% in August 2023, though.

This relatively high inflation is driven by a variety of factors, such as the war in Ukraine and labor shortages. The government may continue its interest rate hikes in the hope of reining in inflation further.

Expert Commentary

What are the main factors currently driving inflation?

“The same factors that led to the spike in inflation last year: (1) Supply chain issues, (2) Tight Labor market, (3) Russia’s invasion of Ukraine. That said, all three major factors are easing. Federal Reserve Bank of New York’s Global Supply Chain Pressure Index is back at normal levels, indicating that supply chains have largely returned to normal. The labor market is not as tight – BLS reports that the quit rate is lower, suggesting that people are staying put in their jobs, and, hence, are not seeking higher wages. The main global economic impact of Russia’s invasion was on the energy market through the sanctions imposed on Russia’s energy sector. Unfortunately, these sanctions are porous, and Russia has found a way to circumvent them by employing a shadow fleet of tankers and switching primarily to India’s and China’s markets, often selling oil at a discount. That, combined with decreasing demand, helped keep oil prices within a range that does put excessive pressure on consumer prices.”
Alex Lebedinsky, Ph.D. – Interim Associate Dean; Professor, Western Kentucky University

“Inflation occurs when total dollar expenditure grows faster than the economy’s productive capacity. While the growth in total dollar expenditure has been falling in response to the Federal Reserve’s efforts to reduce inflation, it is still growing faster than its pre-pandemic trend because households continue to spend off their excess holdings of liquid assets. We can expect this behavior to continue until household holdings of liquid assets return to their pre-pandemic trend. Thus, I believe the factor currently driving inflation is excessive growth in total dollar expenditure caused by households trying to rebalance their portfolios.”
Bryan Cutsinger – Assistant Professor; Assistant Director of the Free Market Institute, Angelo State University

What can be done to continue to slow down inflation?

“I would suspect that holding rates at the current level for about half a year is the best approach. Empirical research on monetary policy tends to show the existence of significant “policy lags,” whereby it takes many months or even a year for the effects of the policy to filter through the system. We won’t thoroughly know the economic slowdown effects of the current 5.25-5.5% federal funds rate until we’ve stuck with it for several months, and the rate is now high enough (and inflation has begun to come down enough) that my view would be that a wait-and-see approach is preferable to continued rate hikes in the near term.”
Brian Wheaton – Assistant Professor, UCLA Anderson School of Management

“On the policy side, a continuation of tight monetary policy (i.e., raising interest rates) is essentially all that can be done. Of course, there is considerable debate among economists as to whether or not the Federal Reserve should raise rates again at its next meeting, given some relatively encouraging recent data.”
Todd B. Potts – Professor, Indiana University of Pennsylvania

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

“I think the current lower rates of inflation seem to suggest that the scenario in which the Fed successfully engineers the ‘soft landing’ is very likely. If inflation is reduced without too much effect on employment, then the economy should be in good shape – everything else being constant. The economic turmoil of the past three years was the result of the pandemic, which led to disruptions in supply and massive reallocation of consumer spending from services to durable and non-durable goods, followed by Russia’s invasion of Ukraine, which affected the energy markets. By most metrics, we are back to or better than pre-pandemic levels of economic activity, so absent major new negative geopolitical events, we should continue to move back to normal. Other risk factors to keep an eye on are real estate markets – both residential and commercial, regional banks – some of which continue to exhibit signs of distress, and increased severity of weather events.”
Alex Lebedinsky, Ph.D. – Interim Associate Dean; Professor, Western Kentucky University

“The current inflation rate is still higher than the Fed’s stated 2% goal. Given that they have a strong incentive to show that they are credible and committed in their fight against high inflation, we could see a future with interest rates continuing to be at their current high levels, at least in the intermediate term.”
Todd B. Potts – Professor, Indiana University of Pennsylvania