Inflation is higher in New York and Hawaii than in Tampa and Denver. Why?

Inflation rose slightly in October for the first time since the spring. Nationwide, prices were up 0.2% month over month and 2.6% year over year, according to the latest Consumer Price Index. 

That headline number, 2.6%, is what we tend to focus on when we talk about inflation, but it only tells part of the story. Inflation is not the same everywhere. In the New York area right now, for example, it’s 4%, while in the Tampa area, it’s 1.2%. In urban Hawaii, it’s 4.2%, and in and around Phoenix, it’s 1.6%.

What’s driving those regional differences in inflation? It mostly comes down to one thing: housing.

If you’re wondering, “why would prices be moving more in one area than another?” Steve Reed, an economist with the Consumer Price Index program at the Bureau of Labor Statistics said, “the rental market is really an area that can vary from place to place more than most markets.”

With most things we spend money on, if prices are rising in one part of the country, they’re likely rising at a similar rate everywhere else. 

“Like grocery store food prices,” Reed said. “That’s mostly a national market. And it’s similar for durable goods. You’re not going to have cars getting way cheaper in Seattle, but way more expensive in Tampa, anything like that.”

Same for clothes, electronics and furniture. 

“One way to think about this is that these are products that can be moved from one place to the other,” said Yiming Ma, an associate professor of business at Columbia Business School.

With anything that can be shipped, there’s competition. If a business in Boise raises the price of dishwashers, a customer can just go online and buy a cheaper dishwasher from somewhere else.

“That’s why in a lot of these sectors where moving products around is more feasible, the regional variations tend to be much lower,” Ma said.

With housing, though, it’s a different story. There isn’t that same kind of cross-border competition. It’s a much more localized market. If you need to live in a specific area for your job, you can’t really go looking for a cheaper apartment somewhere far away. So, housing markets can and do behave differently in different parts of the country.

“In places where there’s a lot more demand for housing, maybe because population or employment is growing, prices might be rising faster,” said Jed Kolko, an economist formerly with the Commerce Department. “Especially in places where there is growing demand and very little housing construction.”

Housing is also a main driver of inflation, because it’s the biggest monthly expense most people have, it’s weighted heavily in the Consumer Price Index.

“Of the basket of goods that a consumer buys, anywhere from 30 to 50% of their wages go into housing,” said Ken Poole, president and CEO of the nonprofit Center for Regional Economic Competitiveness. “So even a small bit of increase in housing can have an outsized impact on your household budget.”

It also has an outsized impact on the inflation rate where you live.

In the first couple years of the pandemic, when lots of people moved away from big, expensive cities like New York to more affordable ones in the Sun Belt, “Florida markets [had] the highest inflation rates,” said Barbara Denham, a lead economist at Oxford Economics. “And they don’t anymore, because their rate of increase in their housing costs is not as dramatic as it had been, say, two or three years ago.”

In fact, the Tampa area now has one of the lowest inflation rates in the country, and New York has one of the highest. 

While housing is the biggest factor, there is another thing that’s playing a role: gas prices. 

“The extent to which different regions are affected by a change in the gasoline price is the extent to which you drive, versus the extent to which you, say, use public transportation,” said Yiming Ma at Columbia.

In Tampa, for instance, most people drive, so gas prices are a bigger part of household budgets, and the inflation calculation, compared to New York City, where many people take the subway. So when gas prices fall, as they have recently, that pushes Tampa’s inflation rate down faster than New York’s.