Consumer prices rising in South and Midwest amid recovery, threatening low-cost appeal

Inflation is squeezing Americans across the country, but it’s pinching in some places more than others.

In recent months, consumer prices have risen more sharply in the South and Midwest than in the West and Northeast, upending the normal pattern of the past several years, according to the Bureau of Labor Statistics (BLS) and analyses by Oxford Economics and Moody’s Analytics.

Economists cite stronger economic growth and consumer demand in the South and Midwest, largely because those regions imposed fewer business restrictions during the COVID-19 pandemic and lost fewer residents – and even gained some – as Americans fled densely populated coastal areas.

“It seems the pandemic is having a larger impact on inflation in the South and Midwest,” says economist Oren Klachkin of Oxford Economics. 

“It’s a bit of a reversal,” says economist Adam Kamins of Moody’s Analytics.

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Both economists foresee the trend fading if the pandemic peters out, but if the delta variant of the coronavirus prolongs the crisis and inflation spikes, it could chip away at the low-cost advantages enjoyed by the South and Midwest.

In the past, the West sustained the largest price increases because of the booming technology industry and runaway demand for homes in San Francisco, Seattle and Los Angeles, Kamins says.

The Northeast has been mixed.

It includes thriving cities such as New York and Boston that draw skilled, high-income workers to their financial, media and technology hubs, as well as expensive housing markets. But the area suffers from declining and aging populations.

In July, overall consumer prices in the Midwest were up 5.9% from a year earlier and 5.8% in the South, compared with 5.2% in the West and 4.3% in the Northeast, BLS’s consumer price index shows. Nationally, annual inflation stayed at 5.4% in July, the highest since 2008.

A CPI measure that excludes volatile food and energy items was up 4.6% in the Midwest and 4.8% in the South, topping gains of 3.9% in the West and 3.5% in the Northeast.

The sharper inflation can especially be seen in the price of services, which rose 3.5% in the South and Midwest versus 2.3% in the Northeast and 2.9% in the West.

Rent was up 2.2% in the South and 3% in the Midwest, compared with 1.1% in the Northeast and 1.6% in the West, BLS figures show.

Used and new cars and trucks, and household furnishings have driven the surge in the price of goods in the South, according to Oxford.

The items represent 15% of the South’s consumer price index but account for 76% of the rise in prices since January 2020. In the Midwest, those items, along with apparel, account for 65% of the increase in goods prices even though they represent just 15% of the area’s consumer price index.

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Marcia Jaffe of Sandy Springs, Georgia, says she paid $17 for a haircut at a chain-owned salon on Tuesday --twice as much as the pre-pandemic price -- and $600 for a new automatic garage door opener.

“The technician said a few months ago this would have been $300,” Jaffe, who is retired, says. But she isn't stressing about it: “My investments are doing well. We just pay what the inflated prices are. Happy to get it.”

Here’s why the South and Midwest are grappling with higher inflation:

Healthier economies

For most of the pandemic, the South and Midwest drew closer to their pre-pandemic levels of activity than both coasts, though the East closed the gap in June, according to Oxford’s recovery tracker.

In April, the South and Midwest were at about 84% of their pre-pandemic levels, based on measures such as employment, restaurant bookings, consumer spending and mobility. The East and West were at about 79% and 77%, respectively.

Unemployment and the share of adults working or looking for jobs were closer to pre-pandemic marks in the South and Midwest, Oxford says.

Why?

The South and Midwest imposed fewer capacity and other constraints on businesses during the pandemic, though they experienced bigger COVID-19 surges.

The less populated regions attracted Americans who fled more crowded areas.

Texas, Nevada, North Carolina, Arizona and Arkansas saw their total populations increase 1% during the pandemic while Illinois and New York recorded a 0.5% drop in population, Oxford says.

Millions of professional service employees who were able to work remotely bolted from New York, San Francisco and Los Angeles, converging on low-cost cities in Florida, Georgia, South Carolina and Missouri, Moody’s data shows.

The increase in residents fueled demand for goods and services that pushed up prices as well as home values, the economists said. . Many remote workers who left New York City for Missouri, for example, earned higher wages than other Missouri residents, further stoking demand and nudging prices higher, Kamins says.

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Supply chain bottlenecks

COVID-19-induced supply and delivery snags have affected the whole country.

Many factories and warehouses are short-staffed as workers care for kids learning from home or sick relatives or choose to stay on enhanced unemployment benefits until the pandemic eases. Those labor shortages are more pronounced in the South and Midwest because demand is stronger in those areas, Klachkin says.

The Midwest is home to many auto and other manufacturers affected by shortages of products and parts. Those shortages, in turn, led to higher prices and bigger raises for workers, increasing consumer demand and prices, Kamins says.

Energy prices

Rising oil prices have triggered sharper wage and price increases in oil-producing states such as Texas, Louisiana and Oklahoma, Kamins says.

All about the base

During the depths of the pandemic a year ago, prices fell more sharply in the South and Midwest because of their dependence on tourism and manufacturing, which were both hit hard by closures, Kamins says. As a result, they’re experiencing bigger price gains from a lower base.

If the pandemic fades and people return to larger cities on the coasts, that probably would spur stronger demand and inflation in those areas while moderating price increases in the South and Midwest, Kamins says.

On the other hand, he says, a persistent health crisis could maintain stronger inflation in the South and Midwest – unless the regions continue to suffer from lower vaccination and higher infection rates. That could cause inflation to look similar across the country, he says.