October brought Arizona’s lowest inflation rate in years with the Phoenix metro area inflation rate being 1.56% year-over-year – a decrease from 2.27% in August – according to the Common Sense Institute.
“This latest reading ends the over 2-year streak of inflation above the standard target of 2.0% annually,” reads the CSI report. “Historically, the Phoenix Metropolitan Statistical Area has experienced significant inflationary pressures, notably in June 2022, when inflation in Phoenix peaked at a record high of 13%, well above the national rate of 9.1%. This trend made Phoenix one of the fastest-inflating areas in the U.S.”
And, the driver of the reduced rate of inflation? Shelter and housing costs.
According to CSI Arizona Director of Policy and Research Glenn Farley, shelter and housing costs have consistently been the root of Arizona’s inflation trends. Over the past couple of years, there have been rapid increases in housing and rental costs, creating rapid interest rate increases and an unsustainable housing market.
Over the past couple months, Arizona has seen what Farley calls “housing market paralysis,” meaning that while housing prices aren’t falling at a significant rate, they aren’t rising either.
“Shelter inflation decreased 0.37% in the two-month period between August and October,” reads the report. “Year-over-year, shelter costs in the Phoenix MSA rose 2.69%. The price index for all items less shelter costs remained practically unchanged with an increase by 0.06 % since August.”
“Cooler inflation in the Arizona market is likely here to stay because the housing market, which was the driver on the upside, is going to stay paralyzed,” Farley said.
Another contributor to this lower inflation rate is the reduction of transportation and energy costs.
“Transportation and energy have been significant contributors to the year-over-year decline in prices, with transportation costs dropping by 4.18% and energy prices decreasing by 11.94%,” reads the report. “These reductions have played a crucial role in easing overall inflation pressures.”
Farley said that energy and transportation cost reductions are typically seasonal, falling during the winter months. Consequently, he predicts that the inflation rate will not go lower than it is right now, but it should be somewhat stable if the housing market remains paralyzed.
While Arizonans may be seeing a slightly less expensive future, Farley said that will not ease the burden due to the amount of lost earnings and increased costs since 2020.
Additionally, current Arizona incomes are still not able to keep up with inflation; real average hourly earnings only increased by 1.4%, not getting up to inflation’s 1.56%.
When it comes to reducing or maintaining low inflation rates, Farley said that for Arizona, it all boils down to the housing market.
“You just need to make it easier to build and to build affordably,” Farley said. “That [would be] local permitting, zoning and regulatory reform.”
He said policies that would reduce housing costs in Arizona, and therefore reduce inflation, are legislation that allows builders to increase the housing supply quickly.
“Bills that I would expect to help with this issue would be bills that encourage jurisdictions to issue more permits, issue those permits faster and be more flexible on the types of permits they issue,” Farley said. “We haven’t really seen the aggressive movement it would take to end this paralysis.”
