Minnesota consumers, businesses deal with fast-rising prices

Trish Wall and her fiancé recently booked a trip to Florida for November, then started thinking they should've received a better deal on rental cars.

But each time they looked, rental car prices were higher than before.

"We've been watching. The prices are astronomical," Wall said while the couple were out for a walk one evening last week. A former rental-car worker, Wall added, "I've never seen anything like it. It's just crazy."

Just as people shake off the economic slump that accompanied the pandemic, there's a new surprise: fast-rising prices.

Economists expected steeper inflation as things got back to normal. The latest monthly figures on U.S. consumer prices, released last week, showed a year-over-year jump of 5% in May. That was the fastest rate since 2008, when the U.S. last experienced recession.

Some believe the price jolt is temporary, shaped chiefly by the effects of catching up after a year of slower economic activity. Others worry it can spiral into something longer lasting, which happened in the 1970s and led people to expect higher prices and change how they spent and invested.

The nation grappled with double-digit rates of inflation for several years in the 1970s and early 1980s. But inflation has been subdued for three decades, last surpassing 4% annually in 1991. For most people of working age, the price jumps now are the biggest they've ever seen.

"Part of what you're seeing in the cloudiness here is that the frame of reference for all of us is: Oh, my goodness, what is that?" said Mark Bergen, an expert on marketing and pricing at the U of M's Carlson School of Management.

The unpredictability of the moment also is influenced by stimulus actions by the government and Federal Reserve, which flooded the economy with money. This week, Fed leaders will weigh in during a regularly scheduled meeting on interest rates.

"We are in uncharted waters with monetary and fiscal policy," said Jim Paulsen, chief investment strategist at Leuthold Group in Minneapolis. "No one knows where we're heading, not even the policy officials themselves."

But in Minnesota and elsewhere, ordinary consumers are adjusting plans and spending, particularly on expensive goods like houses and cars.

"I want to buy a truck, but I've held back because I can't get the discount I did historically," said Steve Stroncek of Edina. "There's a short supply and the prices are higher."

Stroncek and his wife recently watched the price of a remodeling project rise substantially because of a steep jump in lumber. "Steel's up, too. Seems like inflation," he added.

Businesses are also making changes. The three family-run Welna Ace Hardware stores in the Minneapolis area stopped selling 2x4 lumber, a key item in any hardware store.

"We used to sell them for $3.99 or $4.99 and now they're selling for $9.99 apiece. And they have been as high as $13.99," said Molly Welna, who manages the store in Robbinsdale. "We didn't feel good selling that product at that price. You can get them cheaper at Home Depot, and we only make a buck on them through our wholesaler."

Milk prices, after plunging when schools closed last year and pushing more dairy farmers to exit the business, roared back this spring. The benchmark price that farmers are getting for milk is 55% higher than it was a year ago. But producers of milk and dairy products can't pass that entirely onto consumers.

"We are doing what we can to mitigate some of these costs but it is important during times like these to be flexible and adaptable," Catherine Fox, vice president of dairy foods at Land O'Lakes, said via e-mail. "So, where we can, we are changing purchase patterns to ensure consistent supply and to protect us from further rising costs."

Rising prices for cars and trucks, meanwhile, are tied to another pandemic-related distortion: outsized demand for microchips in computers, smartphones and other gadgets that consumers purchased in high volumes last year. Car manufacturers couldn't get the chips when demand for vehicles recovered this year.

"There was a big expectation of new-car sales increase this year and that's not happening because of the lack of new-car inventory," said Scott Lambert, president of the Minnesota Auto Dealers Association. "Manufacturers are building these cars and parking them until they get the chips. Supply will increase eventually."

The imbalance in the market for new cars spilled over into the used-car market. "People who are going back to work this year or who otherwise wanted to buy a new car, who were unwilling to be patient and work with the dealer who might be able to trade with another dealer in the country for the right car, walk over to the used-car lot," Lambert said.

Investors shrugged off the latest inflation data. While the main consumer price index showed the big jump, two related indexes that adjust for volatility have changed little this year. Meanwhile, investors also perceive that many Americans can absorb price increases. Helped by stimulus measures, U.S. household debt levels are low and savings are high.

"A lot of the items that are showing up as outsized, like car and restaurant prices, seem to be related directly to the reopening," Paulsen said. "That makes perfect sense. When we're all shut in our homes for a while and then almost overnight we get to do other things, guess what, we all do it in a blast."

The risk, Bergen said, is that people will either ignore these early warning signs or overreact and panic.

"It's not like there's impending inflationary doom and everybody's going to lose their resources," he said. "But when it does happen, the people who lose are the ones who aren't paying attention and it can happen fast."

Federal Reserve leaders, including Minneapolis Fed President Neel Kashkari, were in a quiet period last week when the inflation data came out. The central bankers refrain from public discussions for several days before and after a meeting of the committee that sets the nation's interest rates.

Kashkari has been an advocate of low interest rates since joining the Minneapolis bank in 2016. In recent interviews, he has said the Fed has other tools besides higher interest rates to fight inflation. He has said policymakers need to put more attention on getting people back to work and not repeat the mistakes made after the 2008 recession.

"It took 10 years to rebuild the labor market, and we cannot have another 10-year recovery," Kashkari told CNN on June 1. "And so while I appreciate the fact that some people are really worried about inflation, they didn't seem that worried when millions of Americans were on the sidelines in the last recovery."

Staff writers Nick Williams and Evan Ramstad contributed to this report.

Jackie Crosby • 612-673-7335

Neal St. Anthony • 612-673-7144