news

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.

“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,” said Dr. Philip Vinson, assistant professor of economics at Georgia Gwinnett College. “On the other hand, some business activity which has been on hold waiting for a rate cut may be cancelled altogether if they don’t think the rate cut will happen after all.”

Vinson said 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. Vinson said not to expect house prices to plummet anytime soon.

“People have to live somewhere, and certain geographical locations are also the key to earning high incomes,” he said. “New supply takes a long time to manifest. We will likely deal with a slightly higher-than-usual cost of living increases for a while due to housing alone.”

In considering rate cuts, Vinson said the Fed 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.

“The other consideration to make is that the Fed has already indicated that it would prefer to cut rates as soon as possible,” Vinson said. “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.”