Justin Lahart, WSJ (“Trump Voters Don’t Just Expect Higher Inflation—They Get It Too“):
Republicans right now think inflation is a much bigger problem than Democrats do, and a lot of that is just politics. But here’s another possibility: Many of the places Republicans live indeed have had significantly higher inflation than Democratic enclaves.
In new research, economists Carola Binder, Rupal Kamdar and Jane Ryngaert examined Labor Department inflation figures for U.S. metropolitan areas, and compared them with voting data. Their finding: Metro areas with more Republicans and independent voters tended to have higher inflation in 2022 than places where Democrats live.
A Wall Street Journal analysis found a similar pattern at the state level. Inflation estimates provided by Moody’s Analytics, combined with voting data, show that states where Donald Trump garnered the most votes in 2020 have on balance experienced higher inflation.
For example, South Carolina experienced the most inflation of any state since the pandemic hit. Its consumer prices rose at a 4.88% annual rate between December 2019 and last month. South Carolina elected Trump with 56% of the votes cast between him and President Biden in 2020.
In contrast, New Hampshire had the least inflation of any state, with prices rising at a 3.75% rate. It elected Biden with 54% of the Trump/Biden vote.
And, no, it’s not just those two states:
The infographic is a bit weird, in that the rate of inflation isn’t dependent on Trump’s share of the vote and the clustering looks artificial. Still, almost all of the states that went for Trump are in the right quadrant.
So, what’s the explanation for this?
Just as importantly, Binder and her co-authors found that people in Republican-leaning states were more likely to expect that higher inflation. While feelings might seem superfluous, economists and policymakers widely believe that expectations do matter. If people think more inflation is coming, that can lead to higher inflation in fact.
That seems counterintuitive but so do observer effects. And it may well be that an expectation of inflation gives businesses more latitude to raise prices.
Other explanations make more sense:
Moody’s Analytics chief economist Mark Zandi reckons that part of what drove inflation higher in Republican-leaning states was housing—especially with so many people moving South after the pandemic started.
“You saw significant out-migration from the Northeast and the West Coast to the South and the Mountain West that tend to be more Republican,” he said. Rents, in particular, shot higher, and rents and rent-derived measures count for about a third of the spending basket the Labor Department uses to calculate inflation.
I’m skeptical that the pattern was uniform but sure.
People in Republican-leaning states also tend to devote more of their spending to gasoline, so the steep run-up in gasoline prices into 2022 probably affected them more. Also, gasoline can play an outsize role in people’s view of inflation—it is a frequent purchase, and the price is right there on the pump.
Again, I don’t know that this is uniformly true but, yes, people in rural areas use more gas than those who live in cities.
But then they circle back to expectations:
But Binder and her co-authors posit that expectations helped push inflation higher.
The theory that beliefs about inflation matter was cemented following America’s painful experience in the 1970s. The more inflation businesses expect, the more they will raise prices in an effort to get ahead of rising costs. Similarly, workers will demand bigger wage increases if they expect more inflation, pushing labor costs higher.
Fed officials spend a lot of time talking about the importance of keeping inflation expectations anchored to keep prices from spiraling higher. And for Democrats, expectations were in fact anchored, maybe because they bought into the Fed’s belief that the recent burst in inflation would prove transitory.
“But people who didn’t believe that narrative, they saw inflation rising and they extrapolated that forward and their expectations rose,” said Binder, author of the new book “Shock Values: Prices and Inflation in American Democracy.” “And that in turn kept inflation rising more than it otherwise would have.”
In October 2022, when inflation was running hot, Republicans in the Michigan survey said they expected prices to increase by 7.6% over the next year, versus 3.1% for Democrats. Even though inflation has since moderated, the gap remains wide: This month’s survey showed Republicans expect 4% inflation, compared with 2.2% for Democrats.
This is all based on a single report, albeit one for the National Bureau of Economic Research.
Skimming the report itself, the co-authors highlight the fact that Democrats and Republicans tend to consume different news sources. Fox, not shockingly, has pushed the bad economy narrative pretty hard, which would certainly add fuel to the “expectations” argument for Republicans.
Additionally, they note (pp 17-18) both “Realized MSA level infl ation was higher in more densely Republican and Independent MSAs” and “Prior to the COVID-19 pandemic, in flation was lower in less heavily Democrat areas. In the post-pandemic period, this relationship reversed.” So, it’s a double whammy. Not only is inflation actually higher but it feels way higher because it’s so unusual.
