When inflation goes up, the hard-earned dollars of people around the nation and state don’t go as far as they used to. But as this economic issue again becomes a hot topic, what does rising inflation mean for those in rural communities in Ohio?
Knowledge Exchange talked to expert Mark Partridge, a professor at College of Food, Agricultural, and Environmental Sciences, to get some answers.
Partridge, the Swank Chair in Rural-Urban Policy in the Department of Agricultural, Environmental, and Development Economics, studies growth and prosperity in states, regions, and cities, with a focus on rural economies. He also researches energy development effects as well as policies that aid local economic growth and produce shared prosperity for all stakeholders.
Inflation is a term that describes when a significant share of the prices that people pay for goods and services are rising, on average, over time, Partridge says. This change is represented by an economic measure called the Consumer Price Index (CPI).
This index is calculated by looking at the prices of everyday goods and services in a representative “basket.” This basket includes items from categories like housing, clothing, recreation, education and communication, and medical care.
Inflation is usually caused by multiple complex factors that can include rapid economic growth, rising demand for products, or an increase in the supply of money circulating in the economy. Supply chain shortages can also affect inflation.
If a small subset of goods is experiencing price spikes, letting the market naturally adjust or self-correct is the preferred solution, Partridge says. In addition, there is little that policy can do to address food or energy inflation because these prices are quite volatile, so these items are usually excluded from the overall “Core” CPI.
However, when increases in the Core CPI suggest that inflation has spread beyond these naturally unstable food and energy prices, policymakers will act to reduce inflation, he says.
“This is usually done through increases in interest rates to reduce demand for products—especially in sensitive areas such as real estate, business investments, consumer credit purchases, stock market prices, and large consumer purchases like cars,” Partridge said.
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Inflation can be problematic because it causes people’s money to have less buying power than it used to. In other words, people can’t buy as many products or services with the same amount of money.
But as with most socioeconomic phenomena, there are both winners and losers from inflation, Partridge says.
If you owe money to creditors, you end up benefiting from inflation because you are repaying money that is increasingly less valuable over time, he says. Yet, if you are the creditor, you receive less valuable money as payment and are worse off.
“In addition, if you are a business that can easily pass on cost increases, or a wage and salary earner who has bargaining power for higher compensation, then inflation is not so bad,” Partridge said.
However, the tight changes in monetary policy that are meant to address inflation can be painful for many households and businesses. For example, higher mortgage rates may mean buyers are less willing to purchase homes, causing home prices to fall. Fewer home sales may also mean fewer furniture sales or housing renovations.
In addition, most wage earners and others, including many seniors, have limited ability to increase their income in line with price increases, Partridge says. Many in these groups can be forced to find ways to cut spending until inflation price pressures recede.
Inflation can affect different groups, such as rural and urban populations, in different ways.
For instance, wages are tied to inflation, Partridge says. The average rural county has a median household income that is 23.9% below the U.S. household average. Because rural areas tend to have lower wages, high inflation can affect them disproportionately as they are less able to adapt to rising prices.
Low-income households also almost always face higher inflation rates because they are forced to buy essential goods that tend to have greater price increases, like electricity, gas, and water, he says. Overall, rural households face more volatile consumer prices.
Fuel-cost shares can also greatly vary for those in remote areas, Partridge says. Rural workers often have very long commutes to work and must travel long distances to important places like daycares and schools. People also must go long distances for groceries, doctor appointments, and entertainment venues.
“The post-Covid fuel price spike likely weighed heavily on the budgets of lower-income remote-rural residents,” Partridge said.
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To further complicate the rural inflation issue, all inflation price indices have an “urban bias,” Partridge says.
To gauge inflation and purchasing behavior for a typical American, the U.S Bureau of Labor Statistics (BLS) samples urban metropolitan and micropolitan areas that have populations of 10,000 to 50,000 people (this measure captures about 94% of the population). The remaining 6% of the U.S. population that are not surveyed for the inflation index are rural locations outside of commuting range of these cities.
How big of a problem is this lack of rural data collection? In Ohio, 17 remote counties comprise about 3.8% of the state’s population (Vinton and Noble Counties are two examples).
“For the tiny number of analysts such as myself that focus on rural areas, we struggle because rural data is sparse and comes after long intervals,” Partridge said. “It also frustrates our rural stakeholders when I tell them that the data they hear about in the media is not available for their communities.”
Yet, estimating a “core-rural” inflation measure would be challenging for the BLS because of the exceedingly high travel costs that would be needed to reach these remote communities and collect this information, Partridge says. The bureau already sends personnel to vast numbers of locations to check large quantities of prices.
Unfortunately, this problem is not just limited to inflation.
“Rural areas are short-changed in almost all timely data collection,” Partridge said.
For instance, the most widely used employment/unemployment report does not consider rural areas, due to similar data collection cost limitations. Rural areas often must wait months or years for comparable economic data, he says.
Still, because rural communities are impacted disproportionately by inflation, measuring and understanding prices and impact in these areas is very important.
Partridge offers the following suggestions:
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Rural households should realize that the prices of products they buy are more volatile and should make plans such as having savings for tough times.
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To improve economic development, rural communities should focus on quality of life, quality public schools, and recreation to attract residents in their 30s and 40s who now have children and are seeking something “slower” for their families.
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Business development should be built from within. Local entrepreneurship as well as small business and existing-business expansion is far more likely to pay off than attracting outside firms with potentially crippling tax incentives that undercut a community’s ability to provide adequate services.
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Understand that there’s no quick fix for these issues. Just relying on the next economic development fad means you will likely flounder. But, too much focus has been on the struggling places, not the success stories (and there are plenty of success stories). Realize that rural economic development is possible.