Price Jumps Prompt Pocketbook Policies in States

Read Stateline coverage of the economic effects of the COVID-19 pandemic.

Wages are high, jobs are plentiful and more than a third of states cut taxes in the past year as their revenues soared despite the ongoing COVID-19 pandemic.

Yet the highest inflation spike in three decades has many state and local policymakers digging for ways to ease the strain on families’ pocketbooks, as they consider measures as varied as imposing rent controls and suspending taxes on gasoline.

Consumer prices rose 6.2% for the year ending in October, the highest rate since 1990, and energy prices rose 30%, according to the federal Consumer Price Index. Federal Reserve Chair Jerome Powell warned Tuesday that inflation could continue into 2022.

The largest consumer price spike, 7.3%, affected a section of the Midwest. A swath of the South was not far behind, at 7.2%. Rural residents of those regions rely on cars to commute long distances and are therefore particularly sensitive to fuel price increases. 

“Gas prices are more of an issue in Mississippi because we’re a very rural state and people have to drive just about everywhere,” said Mississippi’s state economist, Corey Miller. “We don’t have much public transportation because we just don’t have those big metro areas to support it.”

Mississippi is also among the states with the most miles driven per capita, lower only than Wyoming, Alabama and North Dakota.

Some lawmakers in the states most affected by the inflation jump—which are mostly Republican states—have proposed port and trucking deregulation to fight the supply chain bottlenecks driving up some prices. Other officials want to give consumers a direct break with tax cuts.

Florida Gov. Ron DeSantis, a Republican, proposed a six-month suspension of the state’s 26.5-cents-per-gallon gas tax to offset inflation, echoing a proposal by his Democratic challenger in the gubernatorial race, U.S. Rep. Charlie Crist. DeSantis suggested dropping the tax would cost the state $1 billion in lost revenue.

In Kentucky, the Chamber of Commerce plans to lobby for a decrease in the state income tax next year.

“It would allow more working families to keep more of their paychecks,” said Charles Aull, senior policy analyst for the chamber. “As a lower-income rural state we tend to be sensitive to rapid price fluctuation in gasoline, used cars and food too.”  

Eighteen states cut some taxes during the last legislative season, including Iowa and Missouri, which accelerated already planned cuts. Eleven states already had cut state income taxes by July as revenue growth started to exceed expectations.

The states most affected by the consumer price spike are in a section of the Midwest comprising Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota, followed by a region of the South including Alabama, Kentucky, Mississippi and Tennessee.

Some mostly Southern and Midwestern GOP states plan policy moves to ease port and trucking bottlenecks. Fourteen Republican governors signed a November letter penned by Tennessee Gov. Bill Lee pledging to ease regulations on trucking and encourage more shipping in coastal states.

Texas Republican Gov. Greg Abbott blamed inflation on backups at California ports, and on his personal Twitter feed invited shippers to use Texas ports on the Gulf of Mexico to cut costs and get holiday merchandise to consumers. The two-week delay to get through the Panama Canal from Asian ports to Texas is still better than delays shippers face in California, he said. But many large container ships can’t easily navigate the Panama Canal, and some experts have disputed Abbott’s arguments.

Many other Republicans have blamed big government spending during the coronavirus pandemic for the inflation, and many argue that the economy will overheat even more under the newly enacted $1 trillion infrastructure bill and the Biden administration’s pending Build Back Better legislation, which Democrats are now pushing as a response to inflation concerns.

The left-leaning Economic Policy Institute argues that today’s inflation was driven by a COVID-19 shift away from services such as restaurants and public transportation to products such as food and gas, and the resulting supply-chain bottlenecks.

Josh Bivens, EPI’s director of research, told Stateline the current Build Back Better bill could help low-income Americans fight inflation with more subsidized day care, giving them a chance for more income. He agreed that rural residents are more dependent on gas prices, since they lack most public transportation, but said rising energy prices could benefit rural areas with energy-based economies.

Some left-leaning communities are considering rent controls as people who found amazing deals on city rents earlier in the pandemic suddenly find prices spiking.

Soaring rents prompted voters in St. Paul, Minnesota, to approve a rent control ballot initiative in November, though developers are threatening to shelve new housing projects as a result.

The Washington, D.C., suburb of Montgomery County, Maryland, passed a temporary suspension on rent increases in November, and the California city of Palo Alto is debating rent controls. Rising rents as house prices skyrocket can lead to more permanent inflation than commodity prices, economists say.

But rural and impoverished areas of the Deep South may be least able to cope with rising prices, a talking point emphasized in a report by congressional Republicans on the U.S. Joint Economic Committee. 

“Inflation reduces poor Americans’ quality of life, and rising gas prices specifically increase the cost of living for poor Americans living in rural areas much more than for richer Americans,” the report concluded. It refers to a Federal Reserve Bank of Cleveland study from 1992, after the nation’s last major bout with inflation, which concluded that people with low incomes suffer more long-term economic damage from inflation than people who are wealthy.

There are some signs gasoline prices are falling again after the United States and other countries released strategic oil reserves last week in an attempt to combat high prices, and this week President Joe Biden said he might release more. 

“Higher inflation is harder on lower income households who have little to no saving cushion,” said Mark Zandi, chief economist for Moody’s Analytics, a financial consulting firm. The Build Back Better bill would subsidize some of the biggest expenses for low- and middle-income people: child care, care for older adults, health care and education, Zandi added.

Zandi said the rural South, a region with fewer energy jobs, could be hardest hit by inflation. He said he expects “inflation to moderate as the pandemic recedes.”

But some economists such as Federal Reserve Governor Christopher Waller see lingering inflation problems if higher wages meet constrained supplies with no end in sight.

“If a snowfall is one inch and expected to melt away the next day, it may be optimal to do nothing and wait,” said Waller, speaking Nov. 19 at the Center for Financial Stability in New York. “Inflation data are starting to look like a big snowfall that will stay on the ground for a while.”