As spending choices get harder, Minnesotans wonder when big price increases will end

At Kari Merritt's house in Farmington, the air conditioning rarely runs. Shampoo bottles are squeezed to their last drops. The car stays parked.

Paying for all of it costs substantially more these days as Americans endure the steepest run of inflation since the early 1980s.

"Every single aspect of our lives is affected right now: where we go, what we do, what we eat," said Merritt, who is 38 and a mother of five. "I don't know if there's a light at the end of the tunnel."

She's not alone in wondering when this period of rising prices will be over and the tradeoffs and compromises will ease.

"Gas, eggs, everything — it's just obnoxious," Merritt said.

For months, polls have shown growing concern about inflation. In May, a Pew Research Center survey found "no other concern comes close," with 7 out of 10 respondents calling it a "very big" or "moderately big" problem. And in an open-ended question about the country's biggest problems in a New York Times/Siena College poll this month, more respondents cited personal finances and inflation than any other issue.

After the government reported last week that the consumer price index jumped 9.1% in June, speculation began anew that inflation would begin to moderate.

"There is hope on the horizon that this isn't going to keep on getting worse and worse," said Mark Bergen, a professor at the University of Minnesota who studies inflation. "But exactly when and how I'm not sure anybody exactly knows."

That uncertainty is unsettling, he added, especially coming on the heels of two anxiety-producing years of the pandemic. Here's a look at what may finally bring the current run of inflation to an end:

Supplies of goods improve

Production of many goods slowed sharply as the coronavirus spread around the world two years ago. And producers, shippers and distributors couldn't quickly catch up when demand roared back as vaccines brought the pandemic to heel last year.

That imbalance in supply and demand — described with terms like "supply chain" and "logistics" — has taken far longer to correct than economists thought. More recent strains of the coronavirus and the war in Ukraine have added to those challenges.

In an interview last week, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis and member of the central bank's committee that sets interest rates, said he's surprised at the empty shelves he still encounters in stores.

"I was in Walgreens yesterday walking around and there's different categories of empty space," Kashkari said. "I thought 'What is going on that these companies are still having trouble filling the shelves?' It's a head-scratcher to me, but it's real."

But there may finally be a break in the oil and gas sector, which has been the largest contributor to the inflation equation in the U.S. Since reaching a peak in May, oil and gas prices have fallen. In Minnesota, an average gallon of regular gas hit a record high of $4.76 on June 15. By Friday, the average gallon was down to $4.55.

"It's more or less can the market hold," said Patrick De Haan, head of petroleum analysis for GasBuddy, who predicted gas prices could fall below $4 per gallon in August. "We could still be one major disruption away from seeing the derailment for that prediction."

Other commodity prices, such as corn and wheat, also moved lower in recent weeks. Even so, it will take time for those declines to be reflected in the prices consumers pay.

"It's elevators up, stair steps down," said Northstar Commodity analyst Jason Ward. After backing off record highs, the cost of corn and wheat is reaching a sweet spot where producers are making enough money without demand being disrupted, he said.

"Commodity prices coming down is very good for the economy, because it may help us avoid going into a recession," Ward said.

Demand goes down

The Federal Reserve is trying to break inflation by reducing demand for goods and housing. It does that by raising the cost of money through higher interest rates. The central bank has raised them three times so far this year and is expected to do so again this month and into the fall.

There are signs the Fed's moves are beginning to work, said Matt Schoeppner, senior economist at Minneapolis-based U.S. Bank. Consumers are scaling back on some purchases, inventories are beginning to rise, and financial conditions have tightened.

But June's dismal inflation report may cause the Fed to raise rates even higher and faster than already planned. That might throw a wrench into hopes for a so-called "soft landing," in which the economy slows but doesn't fall into recession.

"The idea of that is just becoming more challenging," said Schoeppner, adding that he now sees the chances of a recession happening in the next 18 months as "virtually a coin flip."

In the view of Kashkari, the more the economy leans on the Fed's rate hikes to fix its problems, the greater the risk of overshooting into recession.

"If we have to do all of that adjustment bringing demand down, that substantially increases the likelihood of us not having a soft landing," he said.

Wages catch up

Consumers might feel better if wages rose at the same rate as inflation. But that's not happening and, for most workers, is unlikely to happen. Average hourly earnings declined 3.6% in the last year, after taking inflation into account.

While that's painful for workers, Schoeppner pointed out it also helps to tamp down prices. "That's one thing I would argue needs to happen in order to reduce all of this excess demand that's been built up through the past couple of years," he said.

Without more money to spend, consumers will continue cutting costs and in some cases deciding which bills get paid. Energy Cents Coalition executive director Pam Marshall said low-income Minnesotans face a "heat or eat" dilemma.

"The current circumstances are disproportionately harmful to low-income people and their ability to maintain essentials like energy costs, feeding their families and getting to work because of high gas costs," Marshall said.

The worst outcome

Many forecasters believe inflation will decline to the Fed's goal of around 2%, or close to it, within the next few years. But some skeptics think inflation won't fall quite as fast as many economists and Fed officials have been projecting now for months.

"The sobering thought we should have in the back of all of our minds is we've heard that same tune for the last 18 months," said V.V. Chari, an economist at the University of Minnesota. "This time they might be right — but they've been wrong so far."

What the Fed doesn't want to see is a wage-price spiral in which workers start demanding higher wages to cope with higher prices, leading businesses to raise prices more, and so on. Then, high inflation would become more embedded in the economy and harder to dislodge.

Right now, with job vacancies vastly outnumbering the number of people looking for work, employers are expected to keep raising wages. "While there's a lot of talk about concern in the job market and layoffs, we are not there and we really need people," said Katie Denis, a vice president at the Consumer Brands Association, a manufacturers group.

In the meantime, consumers continue to make hard decisions to save money. Madeline Bostrom, who stays home with her two young children in South St. Paul, said the biggest pain of high inflation is not being able to take her kids to see their grandma as often.

"Visiting my mom is not an option anymore, because she lives an hour and a half away," Bostrom said while shopping for back-to-school clothes. "I can't afford the $40 it would be to get there and back."