Inflation has come down, but prices in Wisconsin remain high. Experts explain what's going on

The state of the economy became a significant concern for many Wisconsin residents when inflation started to rise in 2021 during the COVID-19 pandemic.

Inflation accelerated and prices peaked at 9.1% the following year, and they didn't start receding until 2023 after the Federal Reserve launched interest rate increases aimed at cooling things down. Debate over inflation and who's responsible will be a central issue in the November presidential race between incumbent Democrat President Joe Biden and former President Donald Trump on the GOP ticket.

Despite stubbornly high prices, Wisconsin's economy remained strong for a variety of reasons.

Experts say the Dairy State maintained economic growth thanks to increased migration, new businesses formation, economic freedom, high labor participation force and low unemployment. Those factors helped the state recover quickly from the pandemic and weather the high inflation.

Since 2023, wages have been increasing in almost every industry, which, experts say, is the only way to keep up with high prices.

However, high prices for groceries — and, at times, gasoline — have frustrated Wisconsinites, with many still feeling the economy is not in a good place.

Inflation in the Midwest was mild compared to the nation, Fed says

The Federal Reserve increased interest rates 11 times from 2022 to 2023, bringing them from a historic low of 0.08% to the current 5.50%, the highest rate in more than 20 years.

The increases made borrowing more expensive for businesses and individuals. It also led to increased mortgage and credit card payments and reduced purchasing power, which slowed down the economy. In Wisconsin inflation was at 6.1% twelve months ago and the most recent report showed 3.4% — a significant decrease.

Inflation didn't hit the Midwest states as hard as the rest of the country, and there are different reasons why some people are unhappy with the way things are going, said Thomas Walstrum, a senior business economist in the research department of the Federal Reserve Bank of Chicago.

Walstrum said what drives the inflation rate is the housing market — home prices and the difference in rent growth and owner's equivalent rent, which is the amount property owners charge for rent.

"The Midwest typically has lower inflation than the rest of the country, because rent has been growing more slowly in the Midwest for the past decade," he said.

One result is that Wisconsin residents felt the impact of inflation through higher grocery and gas prices. Grocery prices have been especially slow to recede.

"It's been everything but housing. It's not like home prices in the Midwest didn't go up too, they went up less than the rest of the country," he said.

"The Midwest cooled off too, but not as much."

Wage increases didn't come fast for everyone

Walstrum said that inflation outpaced wage growth in 2021 and 2022, but this started to change in 2023. That's the reason why, for many people, prices still feel high — not everyone have experienced a wage increase.

Walstrum noted that when the pandemic hit, unemployment rose but the government made a huge effort to make up for the job loss with direct payments and business loans that were forgivable.

"Most households saw their savings go up," he said.

But as the Covid-era support went away, he said, those same people now feel the economy has deteriorated.

Over the last year, the consumer price index for the US has been at 3.3% while the Midwest is at 3%.

"At this point, prices are growing more slowly than wages, so purchasing power is rising," he said.

Walstrum said indicators show lower wage earners have seen their salaries grow faster than higher wage earners. He compared growth, consumer price index and average hourly earnings; and since February 2020 until May of 2024 average hourly earnings are up by 22% and prices are up by 21%.

"It's not a big difference," he said. "Overtime earnings — because of productivity growth — should be growing faster than prices."

In Wisconsin, the total private average hourly earnings for May 2024 was $33.76, higher than Illinois ($33.28,) Michigan ($31.97,) Indiana ($30.13,) Ohio ($31.52,) and Iowa ($29.13). However, not every industry has seen an increase in wages and in part that explains why, for many, the economy is not in a good place.

The private's sector weekly average earnings have increased 8%, with industries like construction, manufacturing, trade and transportation, financial services, education and health, leisure and hospitality seeing wage increases between 2% and 12%.

There is also a psychological element with prices, especially at the grocery store. Walstrum said it's undeniable that prices are a lot higher than before the pandemic and it will take more time for people to adjust to these new prices.

"I still notice it when I go to the grocery store to buy food," he said. "When I go buy Lucky Charms, the box used to be $5 and is now $8. It still shocks me every time."

At some point, he said, people will understand that the price is now $8 for a box of Lucky Charms, "but we are not there yet."

The Midwest is a slow growth region, Walstrum said, and the forecast for the rest of the year will be tied to what's happening in the nation as a whole. The median expectation for the U.S. is at 2.1% GDP growth for 2024 and the longer run expectation —2025 and beyond — is 1.8%.

"My expectation for Wisconsin is continued trend-growth for the rest of the year," he said. "The same thing for the Midwest, I don't have a number but I would say something between 0 and 2.1%."

Other experts say the state's economy is in a good place, and it has been so over the last decade.

Wisconsin's economy benefited from new residents, tax reforms

Wisconsin's economy is performing well in comparison with neighboring states, and in many aspects is even doing better than the nation as a whole, according to Scott Niederjohn, director of Free Enterprise Center at Concordia University Wisconsin.

"The unemployment rate is historically low and even lower than the nation's," he said.

Wisconsin's unemployment rate stood at 3.4% in 2023 and is currently at 2.9%, while the nation's at 4%.

Niederjohn's findings also show there has been positive migration for several years and tax reforms have improved the state's competitiveness. The state saw an estimated gain of 20,412 people between July 2022 and July 2023, according to the United Census Bureau. Wisconsin has also climbed 10 positions among the 50 states in the Tax Foundation’s Business Tax Climate Index , currently ranking 24th.

"There's been a lot of movement of people from Illinois into Wisconsin," he said. "(In the past) Everybody considered Wisconsin 'tax hell' with super high taxes."

In business formation and entrepreneurship Wisconsin is now above the U.S. median. Forbes Advisor said Wisconsin is the 14 ^th best state to start a business in 2024. In this ranking, Wisconsin outpaced Illinois (ranked 28 ^th ), Iowa (31 ^st ), Michigan (40 ^th ), and Minnesota (43 ^rd ).

But even as numbers show strength and stability, some people have a negative sentiment towards the economy. Inflation rose too fast and prices have not come down — and they won't. Niederjohn said for prices to come down there has to be "deflation," and that means a recession — and that could mean business cutbacks and job losses.

"When inflation comes down, what it means is that prices are not rising as fast as they were," he said. "It doesn't mean they are falling."

Federal Reserve policies slowed down the economy to control inflation

Brian Jacobsen, chief economist at Annex Wealth Management, said the Federal Reserve's goal of 2% inflation eventually will be reached and lead to interest rates cuts. But even if the Fed does make some cuts before 2024 ends it won't have an immediate impact. The dairy state is forecasted to reach the 2.1% between 2024 and 2025.

"The 2% inflation means that prices will keep rising, just at a lower pace," he said.

Jacobsen agreed that workers need higher wages to catch up with prices. The problem is not every industry can afford to raise salaries, both Jacobsen and Niederjohn said.

"There's actually been decline in the overall wages in some industries," Jacobsen said. "Most of that isn't cutting people wages — the average wage goes down when you have people retiring and you have new people coming in at a lower wage."

Nationally, the financial and tech sector, Jacobsen said, have seen a decrease in salary; while the food service, healthcare, construction, logistics and transportation have experienced an increase.

Jacobsen also said studies show that while economists tend to look at inflation on a month-to-month or year-to-year basis, individuals usually look at what were prices three or four years ago.

"That's why we feel inflation now, even though that inflation curve is bent, and is slowing," he said.

All experts agree that a 2% inflation rate is good — and that is precisely why it's Fed's policy — because it keeps pushing the economy forward. Jacobsen thinks the Fed will have enough data to cut rates in September.

"But this is going to be gradual and slow, is not going to really take the pressure off of people," he said.

Ariel Perez is a business reporter for the Green Bay Press-Gazette. You can reach him at APerez1@gannett.com or view his Twitter profile at @Ariel_Perez85 .

This article originally appeared on Green Bay Press-Gazette: Inflation has come down, but prices in Wisconsin remain high. Experts explain what's going on