Inflation and the Philadelphia Economy

In recent years, inflation has been added to the list of factors contributing to the economic malaise of the private and public sectors of old urban areas such as Philadelphia. This article describes some preliminary empirical explorations of the question, using data from Wharton Econometric Forecasting Associate's (WEFA's) Philadelphia Model data bank. An examination of the private sector data suggests that the relatively slow growth of employment in the Philadelphia Standard Metropolitan Statistical Area has contributed to keeping the overall inflation rate—and housing inflation— relatively low. Exploration of links between economic growth and inflation of energy and wage rates suggests that the net effect of relative high energy cost is only marginal. Relatively low inflation rates in the area have apparently helped to bring about an equilibrating adjustment in relative wage rates— an optimistic note in Philadelphia's near-term future. Inflation has created considerable difficulties in the public sector, however. Of the two major local tax sources — property and wages—wage taxes were better able to cope with inflation than property taxes. Rapidly rising prices exacerbate sluggish property tax revenues. Wage tax revenues have contributed to resolving the budget deficit by offsetting the unresponsiveness of the property tax. Inflation makes reform of the property tax imperative.