Inflation in metro Phoenix is double that of cities like San Francisco and New York. Here's why

Russ Wiles
Arizona Republic

Resurgent inflation has emerged as the economic story of the year, rattling the stock market, threatening to induce a recession and crippling consumers with higher prices for everything from gasoline to groceries.

And metro Phoenix is at the epicenter, not only with the nation’s highest urban inflation rate but with a rate that keeps rising, even as price changes nationally have started to ease a bit.

The Consumer Price Index around the Valley rose at a sizzling 13% pace over the 12 months through August, compared to U.S. inflation of 8.3%. That 13% likely marks a record for the Phoenix area since the federal Bureau of Labor Statistics began tracking numbers, said Lee McPheters, an economics professor at Arizona State University.

It’s also more than double the inflation rate in San Francisco and nearly twice as high as New York, Boston, San Diego and Honolulu.

For the past year, metro Phoenix inflation has surpassed that of the other 22 cities the BLS tracks. While several trends are at play — including higher prices for gasoline and groceries — the Valley’s hot housing market is the main catalyst.

The BLS reports on metro Phoenix inflation, and those in most other big cities, every two months. The trend here over the past year was one of steady escalation. A 5.1% Phoenix-area inflation rate in August 2021 was followed by 7.1% in October, 9.7% in December, 10.9% in February, 11% in April and 12.3% in June. Then came the most recent reading of 13% in August.

All of this doesn’t mean Phoenix is more expensive than other big cities. It isn't. In fact, reasonable living costs are one reason the Valley continues to attract newcomers from other states.

“Workers traditionally have moved here, taken a pay cut and made it up in sunshine,” McPheters quipped.

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Thousands of people moving here

But higher inflation, fueled in part by newcomers, does mean metro Phoenix is catching up to the price levels typical of the largest U.S. urban areas.

Inflation doesn't directly reflect the current prices of goods and services but, rather, the rate of change. San Francisco, Los Angeles, New York and many other places have more expensive homes and apartments, but they haven’t been going up as much lately.

Hence, inflation in those places is more subdued compared to metro Phoenix and other hotspots including Atlanta and Tampa Bay, Florida.

While high inflation can mean painful trips to the supermarket or gas station, it also can reflect economic success. The Phoenix area recouped jobs lost in the pandemic much faster than the rest of the nation. The area also has attracted new industries such as electric-vehicle production while expanding others like semiconductor manufacturing.

“The biggest impact has been the sheer volume of population growth,” said Courtney LeVinus, president and CEO of the Arizona Multihousing Association.

In fact, nearly 67,000 more people moved to metro Phoenix over a 15-month measuring period ending July 1, 2021, from other states compared to those who left, according to a Census Bureau estimate cited by McPheters. That was well above the 54,000 net new migrants that second-place Dallas-Fort Worth attracted and the 42,000 net new residents for the Tampa Bay area, in third place.

Slow increases in housing supply

Coupled with heightened housing demand, new construction stalled after the 2007-2009 recession and was slow to recover. That has contributed to higher housing costs.

Lately, developers have scrambled to build houses, condos and apartments, but supply increases don't happen overnight. It can take up to four and a half years between the time an apartment complex is planned to the time residents are able to move in, LeVinus said. Her organization hopes to see the Legislature streamline zoning processes to help ease this situation.

LeVinus also cited a “rent by choice” trend that indicates many people prefer to rent rather than own, at least in the near term. Some older residents like renting because it means fewer maintenance headaches. Many younger adults are delaying starting families, so for them apartments can make sense, LeVinus said.

Various other residents simply like the ability to retain mobility in a highly fluid job market.

Also, the supply of housing, especially for apartments, is constrained by local "not in my backyard" or NIMBY community opposition, with LeVinus citing Scottsdale and the East Valley as examples. The result is a housing shortage.

“For every rental that’s available, we have about 20 applicants,” she said.

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Upward drift in rents, home prices

Rents have risen locally. One factor cited by Thomas Brophy, national research director at Colliers in Phoenix, is the “trade out” rate, which measures increases or decreases in leasing prices for the same apartment, usually on an annual basis. So far in 2022, Phoenix trade-out lease rates have shown an average price increase of 17.1%, well above the national average of 13.2%.

However, local rent increases have eased, he said, with the most recent rate of 12.8% in August down from a peak of 21.2% last November.

Home prices also have climbed, at least until very recently, with Phoenix-area values jumping 26.5% over the 12 months through June, according to S&P/Case-Shiller. That compares with average home-price appreciation of 18% nationally.

The recent escalation in interest rates sparked by the Federal Reserve to fight inflation likely will slow housing-price appreciation. Rates on 30-year fixed-rate mortgages have vaulted from around 3.2% at the start of the year to roughly 6% today, taking a big bite out of home affordability.

Along with high housing demand, building costs also are an upswing. All sorts of construction activity, including at advanced manufacturing sites such as the Taiwan Semiconductor Manufacturing complex going up in north Phoenix and Intel’s expansion in Chandler, have kept building supplies and labor tight, Brophy said. He expects workers will remain scarce and inflation will remain a problem in the sector.

“I really don’t see a lot of near-term relief,” he said in an email message.

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Housing weighs heavily in calculation 

It’s not just a matter of housing-price gains that are driving inflation; it’s also a situation where housing counts especially heavily in the inflation calculations. For example, one component the BLS tracks is called “owners equivalent rent of primary residence” that weighs in at 23% of national inflation but 28.3% in metro Phoenix. Basically, this measures what homeowners would pay if they had to rent their own premises.

Along with actual rents, owner-equivalent rents and other direct shelter costs, the BLS also includes many related expenses including electricity, piped-in natural gas, furniture, other furnishings and appliances in tabulating an overall housing benchmark.

Overall, housing weighs in at 42.3% of national inflation and even more, 45.6%, in metro Phoenix. Thus, housing is a big deal that really can push up a local inflation rate when rents and home values are rising.

Everything else — food, gasoline, clothing, recreation, airfares, cellphones, medical care and so on — accounts for the other 54.4% in Phoenix and 57.6% nationally.

The national and even metro inflation numbers crunched by the BLS rarely reflect the exact spending of specific individuals, though. For instance, a homeowner with a paid-off mortgage who mostly leaves his or her car in the garage wouldn’t feel the pinch nearly as much as a renter facing a lengthy daily commute.

And as noted, inflation numbers don’t reflect price differences among cities so much as the rates of change in each location, from one period to the next.

Gasoline plays a role in many costs 

When people think about inflation, gasoline prices often come to mind first. With signs advertising current gas prices on almost every commercial street corner, this is a highly visible component. Plus, gas prices often do bounce around a lot.

One factor that significantly affected gasoline prices earlier in the year was limited refinery capacity, said Chris Higginbotham, a spokesman for the U.S. Energy Information Administration. Domestic refinery capacity has dropped by 5% since 2020, equal to about 1 million barrels of daily oil processing.

“California has lost two refineries in that time, and those closures in California have affected prices throughout the region,” he said in an email. “They are likely affecting Arizona, too.”

Arizona receives fuel from pipelines running east from California and west from Texas and New Mexico, but the state has no refineries of its own.

Rising gas prices affect more than just the cost of filling your tank. They’re often imbedded in the costs for all sorts of products that need transporting, which is just about everything. Many service businesses like air-conditioning repair companies tack on fuel surcharges, too.

Over the past couple of months, gasoline prices have come down. Even so, Valley prices still showed a whopping 32.5% increase over the 12 months through August, the BLS reported. The more recent downturn in fuel costs bodes well for containing inflation, assuming the trend can continue.

Despite the direct connection between gasoline prices and inflation in the public's mind, the BLS doesn't attach high significance to this category. The agency gives gasoline a Phoenix-area weighting of just 3.6% and all transportation costs (including new and used vehicles), 18.8%. While transportation is the second-largest major consumer spending component, it's well behind housing.

More costly food at the grocery store

Another notable trend in Phoenix-area inflation affects the third-largest component.

Food prices around the Valley have increased faster than the national average. The cost of food consumed at home —mostly meaning that bought at supermarkets — has risen 15.7% over the past 12 months, the BLS reported.

Among some of the pricier subgroups, a broad animal-protein category that includes meat, poultry, fish and eggs surged 17.9% over that period, while dairy products were up 15% and cereals/baked goods jumped 14%.

Mark Miller, president of the Arizona Food Marketing Alliance, said he doesn't have a solid explanation for why food prices have risen a bit more sharply here than nationally.

“Arizona is a relatively competitive state” in terms of grocery prices, he said, while noting that supermarkets are just one stop in the supply chain that starts with farms and ranches and goes through various middlemen.

Miller also said he sensed that stores have done better in terms of keeping shelves stocked but that many retailers continue to have trouble finding enough workers to meet their needs. In addition, rising gasoline prices put upward pressure on the costs of items throughout the food supply chain, he noted.

Restaurant prices also have risen but not at the same pace lately as grocery-store items. Compared to that 15.7% jump in food consumed at home, the BLS said Phoenix-area restaurant prices advanced 12% over the 12-month period. Consumers often do substitute when the prices of certain items get out of hand. The tradeoff between meals eaten at home or in restaurants provides a good example.

Food and beverages combined account for a 13% weighting among the components that affect Phoenix-area inflation, according to the BLS. 

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Here's what hasn't had big price jumps

Alcoholic drinks are among the relatively few items not to have risen much in price in metro Phoenix lately, with a fairly modest gain of 2.7% over the past 12 months.

Similarly, electricity costs went up just 2.6% over that span, recreation advanced 1.9% and education/communication services slipped 1.4%, the BLS said.

Medical care was a hot-button item for many consumers in past years, but this category rose at a somewhat subdued 8.7% pace over the past year through August.

The BLS' major-category weightings for metro Phoenix, roughly reflecting overall consumer spending patterns, are led by housing at 45.6% of the total. Next comes transportation (including gasoline) at 18.8%, food/beverages at 13% and medical care at 7.8%. The remaining, smaller categories are education/communications (5.1%), recreation (4.8%), apparel (2.3%) and all else (2.6%). 

Nationally, the big-city inflation weightings are as follows: housing (42.3%), transportation (18.2%), food/beverages (14.3%), medical care (8.5%), education/communication (6.4%), recreation (5.1%), apparel (2.5%) and other (2.7%).

These numbers reflect weightings that were in place at the end of 2021 and are subject to updates, especially at the national level. 

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