Why is inflation so much higher in some parts of the United States?
Inflation nationwide is slowing but still twice what the Fed would like, 2%. However, in parts of the US inflation remains more than four times that target.
The Federal Reserve decided to pause its aggressive policy of raising interest rates when it the Federal Open Market Committee (FOMC) met 13-14 June. Over 15 months the US central bank has hiked borrowing costs 10 times in a row sending interest rates from near zero to 5.00%-5.25%. The rapid increase was part of policymakers drive to put the brakes on rampant inflation in the United States.
While Chair Jerome Powell says the Fed has “covered a lot of ground,” he cautioned that “the full effects of our tightening have yet to be felt,” when he addressed the press. Raising interest rates is a blunt tool and there are “uncertain lags with which monetary policy affects the economy.”
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Why is inflation so much higher in some parts of the United States?
Part of those aforementioned lags can be seen in the fact that not every part of the economy is reacting equally to the rate hikes. As well, other factors are also playing a role. One of those is the makeup of the nation. The United States is a vast and diverse country, and each part is in its own way an individual economy composed of dynamics unique to that area.
The Federal Reserve wants to get inflation down to the 2 percent range, which has already happened in the Minneapolis-St Paul and Honolulu metro areas. However, places like Phoenix and Tampa are above 7 percent and Miami is at 9 percent. So what factors are pushing inflation in the latter metro areas to such high levels?
Mainly, it comes down to housing prices which increased much faster in areas that have seen an influx of new residents. The South and West have seen net migration as Americans move to warmer climes as well as following growing job markets. These two regions have also seen above average inflation in general and specifically housing over the past two decades according to the Federal Reserve Bank of Chicago
Furthermore, when housing construction can’t keep up with demand it places additional upward pressure on the cost of purchasing a home and renting. In the case of the Twin Cities, increased housing construction helped tame inflation while in Honolulu housing demand eased, and thus inflation, due to an exodus of population.