Inflation hits Minnesota's smaller cities and rural areas harder than Twin Cities

With food costs rising faster than he's ever seen, Brett Almich, a third-generation grocery store owner in southwestern Minnesota, spends more time running numbers and deciding how much to raise prices.

"I used to worry about being competitive and not overpriced," he said last week. "Now I need to make sure my prices are where I need to make the margin to pay the bills."

The changes are happening fastest on meat and soda, said Almich, whose stores are in Clara City, Slayton and Granite Falls. Suppliers used to give him a few months' notice on a price change, but these days the warnings come with just a week for him to adjust.

Since the U.S. economy last spring took its first big steps out of the pandemic downturn, prices have raced upward at the fastest pace in decades. Smaller towns in the Midwest are among the hardest hit.

Rochester; St. Cloud; Mankato; Fargo, N.D.; and La Crosse, Wis., reached an inflation rate above 8% through the last months of 2021, Moody's Analytics found in an analysis of smaller markets. Duluth was just below that level.

The U.S. as a whole reached 7% — the highest level since 1982 — in December's consumer price index. Urban market data, which comes out every other month, showed the Twin Cities with an inflation rate of 6.9% in November, the latest month available.

For the broader Midwest, inflation was 7.5% in December, far above the 5.9% rate in the more heavily populated northeastern states.

People in the Midwest and in less populated areas tend to spend a bigger portion of their budgets on the very items undergoing the biggest price increases. Gas is a big one, the price of which has risen nearly 50% in the last year.

"Fuel costs are going to hit people harder in the Midwest because they tend to have longer commutes and to travel more," said Louis Johnston, an economics professor at the College of St. Benedict and St. John's University in St. Joseph, Minn.

Things are more spread out, and there's less public transportation. People are more likely to own cars, the prices of which have also greatly increased in the last year. And they're likely to have bigger vehicles that use more gas, Johnston added.

The leap in gas prices also shows up indirectly in goods that have higher shipping costs priced in.

"You have to ship a lot of goods here. We're not on the coasts," said Neel Kashkari, president of the Federal Reserve Bank of Minneapolis. "Rates for long-haul trucking have gone up quite a bit because it's hard to find drivers. Could that be contributing to why this region is seeing more inflation than some other parts of the country? It wouldn't surprise me."

On top of that, living in a colder place than most Americans, Minnesotans also spend more on needs such as heating. The price of natural gas has risen 24% over the last 12 months.

In smaller towns of the Midwest, people also spend a greater portion of their budgets on physical goods, said Adam Kamins, senior director of U.S. regional economics for Moody's Analytics. "Minneapolis is a much more service-oriented economy — and services are not experiencing the same kind of inflation as goods," he said. "So, you're not seeing price pressures quite as pronounced there."

Beyond the reasons for the pricing difference, the effects tend to be more painful in smaller communities, too.

Mark Bergen, an expert on pricing at the University of Minnesota's Carlson School of Management, noted that smaller towns and rural areas have a higher proportion of people on fixed incomes and low incomes, making it more difficult for them to adjust to fast price increases.

"They are likely to have more difficult budget constraints and more difficult trade-offs," he said.

Terri Bunnell knows all about those trade-offs. The higher prices she's been encountering at the grocery store and at the gas pump have led her to stop going out with friends.

"It's not just because of COVID; it's because I can't really afford to," she said.

Bunnell, who lives right outside of Duluth, has a daughter and two grandchildren who live in Iowa. But because of the higher gas and food prices, she hasn't driven down to see them since last May.

When she does buy groceries, she see that the containers they come in are often smaller but the prices are also higher.

The food shelf in Rochester run by Channel One Regional Food Bank has seen a lot more first-time visitors lately, from about 400 a month over the summer to about 650 in November. Virginia Merritt, the food bank's executive director, suspects it's because residents are struggling to keep up with inflation.

"Unemployment is low, and if you look at what is the big thing that has changed in that time frame, it's the increase in prices," she said.

Meanwhile, the food bank, which assists people in 14 counties in southeastern Minnesota, is getting fewer government commodities and less donated food. Grocery stores have more empty shelves because of supply chain issues, which means less leftover food to give to food banks.

"We're buying a lot more food than we typically would," Merritt said.

Coborn's, the St. Cloud-based grocery chain, is seeing inflationary increases in everything from meat to produce to kitchen supplies and paper goods at its 66 stores, most in smaller towns. It partnered with Kansas City, Kan.-based Associated Wholesale Grocers Inc., which just opened a new warehouse in St. Cloud, in an effort to cope with the product availability issues that the grocer also faces.

"We've just adapted new policies and new ways to procure goods as the times rapidly change," said Dennis Host, Coborn's vice president of marketing.

The Federal Reserve signaled last week it will start to raise interest rates, likely in March, to help slow inflation. Many economists expect these high inflation readings to begin to ease in the coming months, though it's unclear how fast they will come down.

But some of the key factors driving up inflation, such as start-and-stop work at factories in countries still contending with high rates of COVID-19, could take much of the year to normalize. The ongoing pressure of inflation may also slow the broader recovery that's been visible in declining unemployment and rising economic output rates.

Phil Lempert, editor of Supermarketguru.com, expects food prices to continue rising for another 12 to 18 months.

"They're not going to go down after that. We have the cheapest food supply in the world, which is great. It's spoiled us," he said. "The days of these really cheap foods is over, in my opinion."

He pointed to climate change as a future threat, noting global potato shortages and floods in Brazil impacting coffee production.

At Almich's Markets, a pound of ground beef runs $4.69 versus $3.99 a year earlier. A 12-pack of Coke now goes for $7.29 versus $6.49 a year ago. Unlike larger corporate grocery stores in the Twin Cities, Almich said stores like his always face higher costs on average than large retailers that buy bigger volumes.

"Being the only grocery store in these small towns means being able to survive is essential," he said.