Minnesota Now with Cathy Wurzer

Twin Cities receives hopeful inflation report: what does it mean for your wallet?

Set of black opened envelope and cash dollars
Inflation in the Twin Cities is at one percent, but some Minnesotans are still feeling stretched.
Karolina Grabowska for Pexels

Inflation in the Twin Cities is at just one percent, according to new data the Bureau of Labor Statistics released this morning. That's lower than the national rate of 3.2 percent and the lowest inflation rate in the Twin Cities since July 2020.

Why is the rate lower here than in other metro areas and what does this mean for your finances? Marcus Bansah, an assistant professor of economics at St. Olaf College, joined MPR News Host Cathy Wurzer to break it down.

Hear the conversation using the audio player above, or read a transcript of it below. Both have been lightly edited for clarity and length.

You saw this figure at one percent, and what did you say?

I said this is good news for all of us, especially people in living in the state of Minnesota. I think Minnesota is leading the way in terms of how inflation is fallen and if other states can follow suit, then it means that we have to kind of bring increasing interest rates to a close so that we can focus on other goals.

I remember hearing sometimes low inflation can be a signal of problems, is that true?

Well, from where we are coming from, no. If you look at the history, inflation falling consistently over time, I don't see that as a big issue at this point. And the national average is still 3.2 percent, we are getting closer to the Feds target of 2 percent.

If you look at other figures, like consumer spending and other macroeconomic indicators, it shows that the economy is still doing well. There are fears of recession but at this point, the figures really show that there isn’t going to be a recession. The figures are trending a good reason and I don't think we should be unduly worried that the economy is becoming weak, because we need inflation to go down so that we can focus on growing the economy again.

What is the metro area doing right to have a low rate?

If you look at the data on housing, you see that on a year-to-year basis, rent prices have fallen by one percent over the period. And the policies that have been put in place to increase affordable housing in the Twin Cities is contributing a lot to this recent drop in inflation, which is a good thing, because housing is a housing causes a major component of inflation.

And so any policy aim at increasing the supply of affordable housing will definitely do that. I mean, if you look at it, the weight of houses around 33 percent and for the period, in recent times, the increase in inflation is maybe 70 percent due to shelter costs. So the policies that have been put in place to provide or supply more affordable housing estate is a major contributing factor.

Also, if you look at the figures, energy prices year on year has also fallen to about 16.7 percent, which is good. And so that's also one of the major contributing factors to the low inflation that we are seeing. Food prices have increased a little bit, 3.5 percent, but housing has fallen sharply. Energy prices are falling sharply and that will be one of the factors that will be contributed to that.

Why are food prices not dropping as low?

That is due to a number of factors. We all know what has been going on in terms of the Russia war in Ukraine, that is one of the factors, whenever you have disruptions in the supply chain. And so if price in the international market has increased, then even the local farmers that we have, they have to kind of see how they can also benefit from that so that some of the issues brought about by the war in Ukraine is a contributing factor.

Of course, higher prices, over the time, also contributed to increasing for transportation costs, thankfully, that is going down. We know that the labor market has been very tight and so that is an issue but it is also improving. I will say that the fate of the war will affect supply chain, talking about high prices that affect transportation costs and also issue of worker shortages over the period.

This inflation report is good, as you say. But there's still so many people looking at their bottom lines, their bank accounts and saying, ‘oh, my gosh, I still feel really stretched.’ Why is that?

We just have to understand the numbers and how they are now. An inflation rate of one percent does not mean that prices are falling one percent on average. So even though we have an inflation of one percent, if food prices are rising by 2.5 percent, it means that you feel it more if you are buying food, but energy prices have fallen by 16.7 percent, it means that you see that benefit.

It depends on the components and whether the consumer is purchasing those items whose price has fallen or whether the consumer is purchasing items whose prices are rising. That will depend on whether they feel the impact of inflation more in their pocket or not. So the short answer is, it depends on what items you are spending your money on.

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Audio transcript

[MUSIC PLAYING] CATHY WURZER: Good news for your wallets. Inflation in the Twin Cities is just at 1%. There's new data in this morning from the Bureau of Labor Statistics. That's compared to 3.2% inflation nationwide. For the Twin Cities, it's the lowest inflation rate since July of 2020.

The Twin Cities became the first major metropolitan area to fall below the Federal Reserve's Target of 2% inflation back in May. It's now dropped even more. Joining us to explain how we got here is Marcus Bansah, an Assistant Professor of Economics at St. Olaf College. Professor, welcome to the program.

MARCUS BANSAH: Thank you and thanks for having me.

CATHY WURZER: You saw this figure, 1% inflation, and you said what?

MARCUS BANSAH: I said, this is good news for all of us, especially in living in the State of Minnesota. And I think we are-- Minnesota is leading the way in terms of how inflation is falling. And if other states can follow suit, then it means that we have to bring an increase in interest rates to a close, and so that we can focus on other goals, like trying to deal with creating jobs.

So this is good news not only for Minnesota, but I think for the whole nation in terms of how policy will map out in the future to come.

CATHY WURZER: My gosh. I remember taking an economics course in college and my professor saying that sometimes low inflation can be a signal of economic problems because it may be associated with weakness in the economy. Is that true?

MARCUS BANSAH: Well, from where we are coming from, we've been having a very high level of inflation. The national average, it peaked at 9.1. Then so if you look at the history, inflation has been falling consistently over time. So because inflation used to be very high, is now going down, I don't see that as a big issue at this point. And the national average is still 3.2%. We are getting closer to the Fed's Target of 2%.

And so if you look at other figures like consumer spending and other macroeconomic indicators, it shows that the economy is still doing well. There are fears of recession, but at this point, the figures have not really show that it's going to be a recession. So if there's any sudden recession, that would be surprising.

So the figures are trending in a good direction in general, and I don't think we should be unduly worried that the economy is becoming weak because we need inflation to go down so that we can focus on growing the economy again.

CATHY WURZER: Got it. What's the metro area doing right to have this low rate? What's contributing to the low inflation here in the Twin Cities?

MARCUS BANSAH: Yeah, sure. If you look at the data on housing, you see that on year-to-year basis, rent prices have fallen by 1% over the period, and the policies that have been put in place to increase affordable housing in the Twin Cities is contributing a lot to this recent drop in inflation, which is a good thing.

Because housing is a-- housing cost is a major component of inflation. And so any policy aimed at increasing the supply of affordable housing will definitely do that. I mean, if you look at it, the weight of housing is around 33%. And for the period, in recent times, the increase in inflation is being caused by-- maybe 70% is due to shelter costs.

So the policies that have been put in place to provide or supply more affordable housing in the state is a major contributory factor. Also, if you look at the figures, energy prices year-on-year has also fallen to about 16.7%, which is good. Prices have been high for gas at the pump. So that-- both year-on-year, that has really gone down. And so that's also one of the major contributing factors to the low inflation that we are seeing.

Food prices have increased a little bit, but-- I think 3.5%, but housing has fallen sharply. And energy prices have fallen sharply, and that could be one of the factors that will be contributing to that, in addition to increasing affordable housing in the state.

CATHY WURZER: You mentioned housing and energy prices falling, and you did mention food costs are down from May, but they're still up 3.5%. Why is it that--

MARCUS BANSAH: --year-on-year.

CATHY WURZER: Year-on-year, correct. Why is it that food costs are not dropping as low?

MARCUS BANSAH: Yeah. So that is due to a number of factors. We all know what has been going on in terms of Russia's war in Ukraine. That is one of the factors. Whenever you have disruptions in supply chain, its effect linger on. And some of the products that we have they are being traded in the international market.

And so if prices of this food in International market has increased, then even the local farmers that we have, definitely they have to see how they can also benefit from that. So some of the issues brought about by the war in Ukraine is a contributing factor.

Of course, high fuel prices over the time also contribute to increase in-- for transportation costs, thankfully, that is going down, which is a good thing. And also, we know that the labor market has been very tight. It's still an issue trying to get workers to go to work because the market has been tight. But that is also improving, so that is good news.

So I would say that the effect of the war with our supply chain, you're talking about high prices that affect transportation costs, and also, issue of worker shortages over the period, which is actually gradually easing out. Could be some of the factors that could still mean that we are paying a little bit more higher prices for food. Yeah.

CATHY WURZER: I have a final question. It's this. There is an element of psychology in economics. This inflation report is good, as you say, but there's still so many people looking at their bottom lines, their bank accounts, and saying, oh my gosh, I still feel really stretched. Why is that?

MARCUS BANSAH: Yeah. We just have to understand the numbers and how they are now-- an inflation rate of 1% does not mean that prices are-- all prices are falling, per se. 1% is an average figure. So when you have an inflation rate of 1%, it means that within the period, some prices are even rising more than 1%.

For instance, we just said that food prices are increasing by 3.5%. So even though we have an inflation of 1%, if food prices are rising by 3.5%, it means that you feel it more if you are buying food. Energy prices have fallen by 16.7%. Well, it means that you see that benefit.

And so we have to understand the figures and know that these are average figures we are talking about. So even though inflation is increasing 1% across the board, it depends on the components and whether the consumer is purchasing those items whose price has fallen or whether the consumer is purchasing items whose prices have risen. That will depend on whether they feel the impact of inflation more in their pocket or not.

So the short answer is it depends on what items you are spending your money on, but on average, prices have increased just 1%, which is the best in the whole country, which is a good thing.

CATHY WURZER: All right. Professor, thank you for the lesson. We appreciate it.

MARCUS BANSAH: My pleasure.

CATHY WURZER: Marcus Bansah is an Assistant Professor of Economics at St. Olaf College.

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