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Why inflation is hitting some U.S. states harder than others

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Moody’s Analytics Director of Regional Economics Adam Kamins joins Yahoo Finance Live to discuss why the central U.S. states are being hit harder by inflation, interest rates, and supply shortages.

Video Transcript

[MUSIC PLAYING]

ALEXIS CHRISTOFOROUS: Welcome back to "Yahoo Finance Live." Nationally, inflation is running at a red hot 7%, but in small towns in the Midwest and South the rate is more like 9%. That's according to a new report on inflation from Moody's. Joining me now to break it down is Adam Kamins, Moody's Analytics director of regional economics. Adam, good to see you here. Before we get into some specific states, if you can just give us an overview as to why the American heartland has become such a hotbed of inflation.

ADAM KAMINS: Sure. So the last few months in particular, the conditions have converged to make the middle of the country a bit more exposed to inflation. So if you think about it, some of the core reasons would be kind of what is the economy all about? What are they making, what are they selling? And the middle of the country is a bit more manufacturing-oriented. And when we think about what the root causes are of inflation right now, those root causes tend to go back to supply chain disruptions, issues with getting raw materials from China and other parts of Asia that have been disrupted by the pandemic. And all of that flows really heavily into these manufacturing areas. So rising prices are affecting firms there, wages are rising there, and that's a big part of the story.

ALEXIS CHRISTOFOROUS: All right, so let's break this down into states for a moment. Because I think a lot of people are going to be surprised to hear this, the state with the most small cities registering inflation of at least 8% last quarter, Wisconsin. And also coming in second was Texas. What is it about those two states, and why are we seeing inflation running so hot there do you think?

ADAM KAMINS: Sure, right. Those are not states who usually think about as being areas where there are very high costs. But a few reasons for that. Again, it goes back to the economic structure. Manufacturing is big in both, and in Texas energy as well. Oil production is a big part of the economy, and energy prices have been just soaring throughout the last few months. So that is putting a lot of upward pressure on prices in Texas.

The other thing I'd say about both of those states and kind of the middle of the country in general is inflation has been a lot more pronounced in goods, as opposed to services. And the middle of the country, the propensity to consume goods is a lot higher than the share of consumption that ties back to services. So people are buying more stuff, basically, in the middle of the country. They're buying more services and spending on different items in the Northeast and on the West Coast. So what we're getting in the middle of the country is kind of on both the supply side and on the demand side you've got factors that are leading you towards higher inflation.

ALEXIS CHRISTOFOROUS: What's interesting is Wisconsin's inflation is sort of becoming a political issue because we have a Senate seat and a governor race in the midterm election this year. Which brings me to my larger question, there was this reporter who asked President Biden this week if inflation was a liability. We've seen it hurt other presidencies, President Carter comes to mind with the sky high inflation of the 1970s. Is there anything the Biden administration can do to cool these high prices?

ADAM KAMINS: It's very difficult for a president or kind of the executive branch to deal with high prices. Really, as most investors are aware, it's on the Federal Reserve. It's monetary policy that really is the key. To the extent that the Biden administration can do anything, I think they've taken some of the appropriate steps. For example, back in the fall trying to help with the Port of LA Long Beach and put some conditions in place there to relieve bottlenecks. Those kinds of things are going to matter really more than anything else.

And I think ultimately, the root cause of all of this goes back to the pandemic. So getting the pandemic under control is going to be key. And to the extent that the Biden administration or any other leaders can kind of get us through the Omicron wave and minimize disruptions going forward, that's going to be the real key.

ALEXIS CHRISTOFOROUS: And you mentioned the Fed needing to battle inflation. How difficult will it be for policymakers to cool decades-high inflation with the tools that they have at their disposal?

ADAM KAMINS: So our point of view at Moody's Analytics is that this is more likely to be somewhat transitory still, that a lot of the factors behind the spike in inflation have to do with disruptions that owe to the pandemic. So I think if, as we expect, some of these supply chain issues continue to ease-- and we've seen that a lot of the Asian factories that are shipping raw materials to the US, that they are remaining open generally through Omicron in a way that they were not able to through Delta. So if you get sort of that kind of easing of disruption alongside rising interest rates, I think we get to a place where by the end of the year inflation is much more under control and people are not focused on it the way they are now for sure.