That's according to a study from WalletHub which compared key inflation metrics within 23 major metropolitan statistical areas in connection with the latest Consumer Price Index data, as well as CPI data from two months ago and a year ago. The findings suggest inflation is impacting certain cities more than others, further stretching the budgets of Americans in particular parts of the U.S.
Inflation rose 3.3% nationally in May compared to a year ago but rosed even higher in Detroit at 3.5%, a year ago, San Francisco at 3.8%, Seattle at 4.4%, Dallas at 5% and Honolulu at 5.2%, WalletHub's study shows. In contrast, inflation's impact in San Diego, Atlanta, Denver, Minneapolis and Tampa, has been far less extreme in some cases, with those cities seeing increases between 1.8% and 3.2%.
Inflation in Dallas is particularly intense due to a housing shortage that is driving up the cost of shelter, one local economist said. The Dallas-Fort Worth area has seen an influx of 150,000 residents between July 2022 and July 2023 and those new residents haven't found adequate housing, said Dean Stansel, a research economist at Southern Methodist University in Dallas.
"Government restrictions on the construction of new housing are making it difficult for supply to keep up with demand," Stansel told CBS MoneyWatch. "That housing shortage is driving prices higher than they would otherwise have been."
Source: WalletHub
Other cities like Seattle are likely still struggling with inflation because of minimum wage hikes that have added higher labor costs to local businesses, Stansel said.
"Those higher labor costs lead to higher prices for the output of firms using minimum wage labor, such as fast-food restaurants and grocery stores," Stansel said. "Those higher prices for inexpensive food are particularly burdensome for those with low incomes struggling to make ends meet."
The CPI data released this week pushed the Federal Reserve to leave its benchmark interest rate unchanged and pencil in only one rate cut for this year. The Fed has not disclosed when that rate cut will happen.
Within the data, the price of airfare, furniture, clothing, new vehicles, energy and recreation fell in May, helping contain inflation, but shelter costs increased for a fourth straight month, up 0.4%. Medical care, used cars and trucks, education costs, and food away from home also edged up. Economists say shelter and fuel costs are the two biggest anchors weighing inflation from reaching levels the Fed wants to see.
"The expectation is that inflation in these areas should eventually fall as these price effects run their course in different markets, but this is admittedly taking longer than many initially predicted," Grant Black, an economist at Lindenwood University, said in WalletHub's study. "Thankfully, recent inflation data show that food and fuel prices have begun falling modestly, which is a benefit to consumers' budgets."
If inflation doesn’t drop back to where it was before the pandemic, nearly every American—rich or poor—will see their spending power diminished, a new working paper finds.
“It’s like a permanent tax hike,” says Boston University economics professor Laurence Kotlikoff, who co-authored the paper.
For months, the prevailing economic view has been that high consumer prices were a temporary phenomenon, and that price increases would soon moderate. But while inflation has dropped sharply from a peak of 9.1% in June 2022, it has defied predictions for further declines. In recent months, it has been bouncing in a range of 3.1% to 3.5%—well above its 2.3% annual rate in 2019.
Most economists still say inflation will subside in the coming months as slowing rent increases eventually show up in the numbers. Indeed, the May inflation rate eased to 3.3% on an annual basis from 3.4% in April, raising expectations that the Federal Reserve will lower interest rates later this year.
But what if inflation were stuck at a higher rate—or, worse yet, rose from its current level—because of mounting federal debt, housing shortages, or others factors we don’t understand yet? While that might not be the most likely scenario, the paper’s analysis illustrates the erosive impact of persistent inflation on consumers’ wallets.
The National Bureau of Economic Research working paper lays out the toll of lifelong high inflation on consumers. It estimates that permanent 5% inflation would lower household lifetime spending by a median 3.62%, compared with zero percent inflation. Permanent 10% inflation would lower lifetime household spending by a median 6.82%.
Even if inflation ran permanently at the Fed’s 2% target, consumers would still feel a pinch, with a 1.5% reduction in lifetime household spending, Kotlikoff estimates. The last time inflation was at or below the central bank’s goal was 2018, when prices rose at a 1.9% rate for the year.
This inflation-induced pain, however, isn’t the same across tax brackets. The richer you are, the bigger the effect. The top 1% in lifetime resources would see a median decline in lifetime spending of 8.52% under permanent 5% inflation, and a decline of 15.9% under 10% inflation, the paper calculates. By contrast, the bottom 20% would see declines of 3.47% and 6.76%, respectively.
“We looked at effective inflation as it works through the tax system, and the imperfect adjustments in some of the structural elements of our tax system—that essentially increase the tax liability of the individual as inflation rises,” says paper co-author David Altig, chief economic advisor for the Federal Reserve Bank of Atlanta. “It creates a world in which inflation, which ought to be relatively neutral, is not.”
One of group especially affected by inflation is the 67 million Ame
ricans who are collecting Social Security. Their benefits are adjusted annually for inflation, but they still get hit hard because the benefit increase every January reflects the previous year’s price changes. If inflation keeps rising briskly year after year, Social Security recipients never catch up.
Persistent 4% inflation is equivalent to about a 2% permanent drop in spending power for Social Security recipients, the paper found. If inflation were to surge to 10% and remain there, it would effectively lower Social Security benefits by about 5%, according to the analysis.
Just as with Social Security benefits, tax brackets are adjusted for inflation. But there is also a lag there, and that particularly hurts the middle- and upper-income filers in a period of permanently high inflation.
The wealthy and families that are accumulating wealth get hit even harder. That’s largely because they get taxed on nominal capital gains in asset values—not on gains that are adjusted for inflation.
Suppose someone bought $100,000 worth of stock and it doubled in value over 10 years to $200,000. Now suppose that consumer prices also doubled during that period, effectively offsetting that $100,000 gain. At the end of the decade, that $200,000 would have exactly the same buying power as $100,000 did 10 years earlier. Yet if that person sold that stock, they would have a $100,000 capital gain on paper that they would have to pay taxes on—even though they actually gained nothing in real terms.
“The real issue is we’re taxing nominal asset income, not real asset income,” Kotlikoff says.
To be sure, the government throws some big tax breaks at homeowners. If a house rises in value, a single homeowner selling that house doesn’t have to pay capital-gains taxes on the first $250,000 increase; a married couple escapes taxes on the first $500,000. But those numbers haven’t changed since 1997, and consumer prices have nearly doubled since then, so these tax breaks aren’t nearly as valuable as they once were.
And some income brackets for certain government benefits aren’t adjusted. That top bracket for Medicare premiums is $500,000 for single filers and $750,000 for joint filers. Seniors who hit those income levels pay a monthly premium of $594, compared with a monthly premium of $174.70 for the majority of Medicare recipients. The $500,000 and $750,000 number haven’t changed for several years. As incomes rise, more people are finding themselves in the top bracket—even though inflation has lessened the spending power of those earnings.
“If you’re asking why people are so upset about inflation,” Kotlikoff says, “it may be this hidden explanation—that everybody is being taxed at a higher level.”