Inflation is slowing nationwide, and Twin Cities consumers are seeing lower prices than many Americans, according to federal data released Thursday.
The Consumer Price Index (CPI) in the Minneapolis-St. Paul region rose 2.2% year-over-year in September, compared to 3.7% nationally, the U.S. Bureau of Labor Statistics (BLS) reported. The increase was the lowest among several metro areas, including Chicago, Boston, Dallas, Denver, San Diego and Washington, D.C.
Though inflation is headed in the direction policymakers want, it could be a while before consumers feel any benefits.
"I think that's much harder for people to feel than when prices started shooting up overnight," said Tyler Schipper, an associate economics professor at the University of St. Thomas. "And there's still kind of a collective sigh about, 'Oh, I want to go back to 2019 prices.' And in a general sense, that's not going to happen."
Nationally, the CPI for all urban consumers rose 0.4% between August and September, driven mostly by housing and gas prices. Shelter costs, which include both housing and lodging away from home, have risen 7.2% since September 2022, while gasoline has risen 3%.
Locally, grocery prices were up 0.5% from a year ago, though dairy and produce dropped in price.
"Core" inflation, which excludes volatile food and fuel prices, rose 4.1% nationally year-over-year. Some goods, including clothing and used cars and trucks, have dropped in price since August.
"Things are going pretty much the way the Fed and most forecasters had anticipated," said V.V. Chari, a University of Minnesota economics professor. "But I think that it's still going to take some time, even under their most optimistic estimates, for the inflation rate to get to the target" of 2% nationally.
Here are 5 things to know:
Inflation is still climbing, but more slowly
The Consumer Price Index measures the change in prices consumers paid for goods and services, from coffee to whiskey and dental appointments to haircuts.
Price increases reached a 40-year high of 9.1% in June 2022, but the rate of inflation has fallen since. The Federal Reserve's goal is 2% inflation, which is the agreed-upon level to achieve both maximum employment and price stability.
"Even though recent inflation data have been encouraging, inflation remains too high," Philip Jefferson, vice chair of the Fed, said in an Oct. 9 speech in Dallas.
As inflation remains high, the value of the U.S. dollar is weakened.
"The problem with the price of a dollar bill is, it's a dollar," said Christopher Phelan, a U economics professor and consultant to the Minneapolis Fed. "The dollar is devaluating, in terms of the goods and services it can buy, at about 3.5-4% a year at this point, which is a higher rate of devaluation than we like."
Deflation vs. disinflation
Americans are experiencing disinflation, meaning the inflation rate is falling, but prices aren't. That can leave people feeling their dollar doesn't stretch as far.
"The real income levels, inflation-adjusted, are not rising. They're coming down for most individuals. And even though we're experiencing disinflation, it's not deflation," said Ernie Goss, an economics professor at Creighton University. "So, in other words, you still feel poorer."
A decline in inflation-adjusted earnings adds to the pressure on consumers: Bureau of Labor Statistics data released Thursday showed real average weekly earnings decreased 0.2% from August to September.
Minnesota is doing better than the nation as a whole
Inflation declines in the Minneapolis-St. Paul region have stood out for a while compared to the rest of the country. Schipper attributed the trend in part to lower population growth in the Upper Midwest, and a spree in multifamily housing construction in the Twin Cities.
"When you have less people wanting homes, too, that's also going to put less upward pressure on both rental prices and home rates," he said. "I think those two things combined probably explain a big part of it."
Housing is key
Shelter prices accounted for more than half the national CPI increase. Without that price category, Schipper said, inflation would be at 2%.
Generally, what's happening with housing prices doesn't immediately show up in the CPI data, he said. But so far, the numbers aren't reflecting the real-world slowdown in the way economists would expect.
"If it doesn't show up, it's going to start being really hard for the Federal Reserve to get back to 2%, which is what they want," Schipper said.
The Fed will (maybe) raise interest rates again
The Federal Reserve's Federal Open Market Committee (FOMC), which sets monetary policy, has been raising interest rates since March 2022.
After raising rates to 5.25%–5.50% in July, the FOMC held rates steady in September. The committee is scheduled to meet Oct. 31-Nov. 1, and there's disagreement among Fed-watchers about whether they'll raise rates again, either then or at their final meeting of the year in mid-December.
Interest rate hikes are the key tool the Fed uses to slow spending and bring inflation down. It takes time for higher interest rates to have the desired effect, and Fed officials have said they intend to leave rates high for a while. But not everyone agrees another quarter-percent hike is needed.
"A majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate," minutes from the FOMC's September meeting read, "while some judged it likely that no further increases would be warranted."