Twin Cities is the first in the nation to get inflation below 2 percent annual rate

Inflation has put a strain on places across the country. But the Twin Cities may be winning the race to keep it in check.

In May, the annual inflation rate in the region dropped below the Federal Reserve’s two percent target — making it the first major metropolitan area to do so.

Two Bloomberg reporters say that's thanks to the city's investment in affordable housing. One of those reporters, Augusta Saraiva, broke down what it means on All Things Considered.

For the full conversation, click play on the audio player above or read the transcript below. The transcript has been lightly edited for clarity.

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What does it mean to say that Minneapolis has tamed inflation?

The Federal Reserve has a mandate to bring inflation down to a two percent target and the Twin Cities as a region was the first metropolitan area in the U.S. to be able to bring the annual inflation rate back down to 1.8 percent per year. That means that prices are still rising — just at a slower rate.

What factors do you think explain Minneapolis’ and the Twin Cities' relative success over other metro areas?

It seems like housing has been playing a big part. Minneapolis and St. Paul have been making big bets when it comes to housing even before the pandemic.

Just to give you an example, the City of Minneapolis eliminated zoning that allowed only single-family homes. Since 2018, it has invested more than $320 million in rental assistance and subsidies.

Those are just two examples that have made the local housing market more competitive but also more affordable. And because housing is such a big part of what we call the inflation basket — that is already translating into a deceleration in inflation.

It may seem obvious that housing is so important in that inflation basket but why?

The way that inflation is calculated is that you have different elements that add up and then you have the annual inflation rate. So, you can think about grocery prices, you can think about grain prices and each of them contributes a different percentage to what we call the inflation basket.

Housing is the largest component to the inflation basket. When you think of the overall basket, it accounts for more than 30 percent. So that's why any change in prices when it comes to housing is so important to the equation.

How much of an expansion have we seen here in the metro when it comes to affordable housing?

Last year, the Minneapolis region got authorization to build almost 15,000 multifamily buildings. That includes apartments and duplexes. And when you look at that number, that's one of the highest rates in the country for any metropolitan area.

It certainly wasn't all good news. Black and white households still show the highest difference in homeownership rates. Why is that important when we're talking about inflation?

The New York [Federal Reserve] actually has some interesting research about how people of color tend to hurt more from inflation and one of the reasons for that is because housing costs are such an important part of the inflation basket.

When you think about how people of color are more likely to be renters, that is also something to keep in mind when you think about housing policies — and when you think about how to make housing more affordable for people across the board.

What has to be in place as you see it for Minneapolis to keep this up?

The main takeaway from the story is that increasing the supply of housing does help when it comes to making things more affordable. So, maybe cities across the country can take some lessons from the success story about how you can boost housing supply and make sure your residents can afford to live.