Is inflation lower in the Twin Cities because fewer people want to live here?

For a few months now, a common theme in the local media is that the inflation rate in the Twin Cities is lower than in comparable metropolitan areas.

In October, the Star Tribune reported that:

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.

I don’t doubt that that is what the data say. I also don’t doubt those who attribute the relatively good performance of the Twin Cities with inflation to their lower readings for housing costs. And I also don’t doubt that an increased supply of housing might be driving some of that.

But prices are determined by demand as well as supply. Data show, after all, that for all these new housing units being built the population of Minneapolis rose by 461 residents from 2021 to 2022 while St. Paul’s fell again, by 3,974.

By contrast, let us look at the other end of the inflationary spectrum. Bloomberg reports that:

Floridians aren’t seeing the let-up in price pressures that other Americans are

Miami’s annual inflation rate of 7.4% in October was the highest of the US metro areas tracked by the Bureau of Labor Statistics, and more than double the national average. Tampa stood at 6.7% in September. By comparison, Phoenix and Atlanta, two other inflation hot spots last year, have seen their rates drop to roughly 3%.

Sounds bad. Indeed, you might look at that and think that the Twin Cities are better off than Miami and Tampa. But hold on:

Much of the stickiness of inflation in Florida appears to be driven by people and businesses relocating to the region, boosting spending and demand for homes and energy, said William Luther, an associate professor of economics at Florida Atlantic University.

“People want to live here, and that looks very promising for Florida’s future,” Luther said. “The trade-off, of course, is that that adjustment takes some time, and so you get an increase in prices here in areas like housing.”

Florida’s low taxes and sunny weather have made it a magnet for people to relocate there, from billionaires like Ken Griffin to retirees. Large financial firms such as Griffin’s Citadel financial empire, Goldman Sachs Group Inc. and Blackstone Inc. have brought in new workers who are well compensated and pushed up prices.

The Sunshine State’s outsize inflation stems from its population growth, which rose faster than any other state last year, and a housing shortage that’s stretched for at least five years, said Sean Snaith, director of the University of Central Florida’s Institute for Economic Forecasting.

Florida ranked second behind Texas in the numeric increase in population last year and had the highest percentage growth of any state, according to US Census data. Population growth in Tampa ranked 7th among 384 metro areas, and Miami ranked 15th.

By contrast, the Star Tribune notes that the low inflation rate in the Twin Cities is due “in part to lower population growth.”

I am a little dubious of describing this data as reflecting ‘inflation.’ That is a rise in the price level, not a rise in prices relative to each other. If the price of eggs goes up because of a new diet fad or because half the chickens died, you do not have inflation you just have more expensive eggs. The same applies here. The differing rates of inflation in the Twin Cities and Florida metros seem to reflect to a large degree the fact that accommodation is so much more sought after in Florida than in the Twin Cities because so many more people want to live there: including, on balance, Minnesotans.

So remember, the next time you hear someone touting the Twin Cities’ low inflation rate, the facts behind that.