When the Federal Reserve convenes at the end of January 2023 to set interest rates, it will be guided by one key bit of data: the U.S. inflation rate. The problem is, that stat ignores a sizable chunk of the country – rural America.
Currently sitting at 6.5%, the rate of inflation is still high, even though it has fallen back slightly from the end of 2022.
The overall inflation rate, along with core inflation – which strips out highly volatile food and energy costs – is seen as key to knowing whether the economy is heating up too fast, and guided the Fed as it imposed several large 0.75 percentage point interest rate increases in 2022. The hope is that raising the benchmark rate, which in turn increases the costs of taking out a bank loan or mortgage, for example, will help reduce inflation back to the Fed target of around 2%.
But the main indicator of inflation, the consumer price index, is compiled by looking at the changes in price specifically urban Americans pay for a set basket of goods. Those living in rural America are not surveyed.
As economists who study rural America, we believe this poses a problem: People living outside America’s cities represent 14% of the U.S. population, or around 46 million people. They are likely to face different financial pressures and have different consumption habits than urbanites.
The fact that the Bureau of Labor Statistics surveys only urban populations for the consumer price index makes assessing rural inflation much more difficult – it may even be masking a rural-urban inflation gap.
To assess if such a gap exists, one needs to turn to other pricing data and qualitative analyses to build a picture of price growth in nonurban areas. We did this by focusing on four critical goods and services in which rural and urban price effects may be significantly different. What we found was rural areas may indeed be suffering more from inflation than urban areas, creating an underappreciated gap.
The rest of the piece is organized under these headings:
1. The cost of running a car in the country
2. Rising cost of eating at home – and traveling for groceries
3. The cost of growing old and ill outside cities
4. Cheaper home costs, but heating and cooling can be expensive
Here is the conclusion:
Inflation – a disproportionate burden
While there is no conclusive official quantitative data that shows an urban-rural inflation gap, a review of rural life and consumption habits suggests that rural Americans suffer more as the cost of living goes up.
Indeed, rural inflation may be more pernicious than urban inflation, with price increases likely lingering longer than in cities.
2 comments:
I think a history of CPI - what it does, and doesn't reflect and how it has changed since its development as economic dynamics change - would be fascinating. I wonder what potential solutions are regarding compiling and synthesizing economic data in a manner that reflects the reality for all of the United States. Breaking down inflation statistics between "urban", "rural", "suburban", "exurban", etc. seems like it would require an extensive overhaul of economic data calculation and I'm not sure would provide better insight because - as we have discussed in class - the "rural" category encompasses such a diverse array of places - the same is obviously true of the other categories. I'd be interested in learning about how "urban" consumers were selected as the demographic to track by the BLS in its inflation calculation.
Thank you for this post! I think, as alluded to in this post, that the wages and salaries in rural places is also lower than those in urban areas. This exacerbates the issue of inflation and its measure. On top of that, rural spaces that are governed by more conservative state governments often suffer in terms of public food and income assistance, further worsening inflation for low income households. While people focus on the price of fuel and gas, the nuances of this crisis are often lost, including the issues raised in this post. Again, thank you!
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