Understanding Inflation in South Carolina

Put simply, inflation is the rising price of goods and services. However, inflation is not just about price tags; it is about how price changes ripple through the economic system, impacting consumer behavior, business decisions, and overall economic activity.

When inflation makes the news, we usually hear about one of three common indicators: the Consumer Price Index (CPI), the Producer Price Index (PPI), and the Personal Consumption Expenditures (PCE) index. CPI “headline inflation” measures the price of a basket of items we purchase (e.g., beef was $5/lb. but rose to $6/lb.). PPI reflects price changes that producers pay (e.g., steel prices rise, and thus, we expect prices for products that contain steel to eventually rise). PCE, like CPI, tracks categories of consumer spending, but allows substitution (e.g., if beef prices rise, we might instead buy chicken), meaning we track changes in spending by category (e.g., food, whether beef or chicken).

Why Inflation Matters

But inflation isn’t just about higher prices. It also has a deep impact on the behavior of consumers and businesses. If we had negative inflation (“deflation”, in which prices fall), we may delay spending and wait for lower prices. On the other hand, when inflation is high, we feel pressure to spend quickly before prices rise further, increasing demand and, in turn, driving prices still higher in a self-reinforcing spiral.

Inflation has hit South Carolina particularly hard. Using data from the Bureau of Economic Analysis (BEA), South Carolina’s per capita income is lower than many states (2024: $60,766) ranks 45^th among the states, and below the U.S. average (2024: $73,204). However, the price of a new car and the prices on Amazon are the same across states. Rising prices, especially since 2020, have hit the Palmetto State harder as a percentage of income. Further, the net migration of new residents to SC has resulted in yet more demand for housing and services and has further driven up prices.

The Causes of Inflation

There are numerous explanations for inflation, and while some are myths, the veracity and importance of other explanations vary based on which economist is at the lectern. In reality, inflation results from a variety of interconnected factors:

• Monetary Expansion: A key cause of inflation is an increase in money supply. When there is more money in the economy without a corresponding increase in goods and services, the value of money decreases, causing prices to rise. To illustrate, in 2020, the Federal Reserve implemented a program of quantitative easing in which it injected money into the economy to stimulate growth. As the money supply has grown, the purchasing power of the U.S. dollar has diminished.
• Demand Pull Inflation: If demand for goods or services outpaces supply, businesses raise prices to balance demand with capacity.
• Cost-Push Inflation: On the supply side, rising production costs, whether increased wages, raw material prices, energy, or other, are passed on to buyers.
• Expected Inflation: If we expect prices to rise, we accelerate purchases, businesses might preemptively raise prices, and workers might demand higher wages in anticipation. These actions create a feedback loop where inflation becomes self-fulfilling. Interestingly, while we expect prices to move up or down based on supply and demand, we observe that prices are “sticky” on the way down. That is, they often move down slowly or not at all.
• Structural Issues: Inflation can arise from structural problems in the economy, such as labor or skills shortages (e.g., if we have too few medical doctors) that drive up wages and, therefore, prices. Similarly, the lack of competition in an industry typically results in higher prices.
• External Shocks: Geopolitical tensions, wars, and trade tariffs can affect supply and thereby contribute to inflation by decreasing supply or increasing costs for businesses.

However, there are also myths surrounding inflation:

• Corporate Greed: The idea that firms raise prices due to greed is often cited. However, if a firm raises its prices, a competitor will undercut those prices and take market share. Sufficient competition limits this.
• Federal Spending: Federal spending is excessive. But some argue that inflation is caused by excessive government spending alone. Government spending can be inflationary (e.g., when excessive government spending competes with consumers for goods and services) or when excessive government spending is funded by expanding the money supply (see Monetary Expansion above), but not by the excessive spending alone.
• Wage Increases: Wage increases that are less than productivity changes are generally not inflationary. For example, if worker productivity increases by 25%, a 20% wage increase is not inflationary because more goods are produced. However, if wages rise faster than productivity, prices will rise (e.g., coffee barista pay rises, but the same number of coffees is sold).
• Money Printing: While money supply has increased significantly since 2020, actual “printed” money has only played a minor role. Since January of 2020, the M2 money supply has increased significantly (from about $15T in 2020 to $22T in 2025), while printed currency (from about $1.7T in 2020 to $2.3T in 2025) was less than 10% of the total. Contrast this to the story of Weimar Germany in which the physical printing of currency caused hyperinflation and the regime’s eventual collapse.

What Can South Carolina Do?

While inflation is a nationwide issue, state-level actions can mitigate its impact and promote our long-term economic stability. Policy makers can counter inflation by drawing on principles of free markets, competition, and minimal government interference.

• Let the Market Work

  Eliminate market distortions that prevent efficient price signals. For instance, minimum wages and price controls lead to artificial pricing, which distorts supply and demand. Allowing wages and prices to adjust based on market forces encourages businesses to react to economic signals efficiently, leading to better resource allocation and less inflationary pressure.

• Reduce Regulatory Burdens

  Regulations, especially those related to building permits, transportation, and business operations, add costs to goods and services. By streamlining regulations and making it easier for businesses to operate, the state can lower costs. For example, easing zoning laws and permitting requirements for new housing will increase home supply. Similarly, reducing transportation regulations lowers the cost of moving goods in the state.

• Promote Sound Fiscal Policy

  Taxpayers pay for the operation of state and local government. Sound fiscal policy that keeps spending in check means taxpayers won’t face higher taxes to fund excessive government spending. This could include restrictions on borrowing (ensuring the state doesn’t run up debt).

• Promote Competition

  We need more competition among providers of goods and services, starting with large expenditures (e.g., housing, healthcare, insurance, transportation). For example, we are not allowed to purchase health insurance from out of state. When we buy or sell real estate, transaction costs are 5-6% of the sale price. We cannot buy automobiles directly from manufacturers. While we have taken steps to reduce certain barriers (e.g., in healthcare Certificate of Need legislation), we must reduce over-restrictive licensing (e.g., medical doctors and nurses) and other barriers that reduce or limit competition. Competition brings prices down.

• Encourage Entrepreneurship

  More entrepreneurship and local production create competition and reduce reliance on imports, which can cost more due to shipping costs. Further, incentives, preferential policies, and tax breaks for local businesses that produce goods within the state reduce the leakage of profits to out-of-state firms.

• Supply-Side Reforms

  Encourage investments and reforms that boost productivity. For example, energy infrastructure will lower energy prices to ready us for the increasing demands of an AI-driven economy and will attract more manufacturers. More workforce development helps us meet the demand for skilled labor without artificially increasing wages.

• Economic Education

  Promote economic education statewide to help South Carolinians better understand the forces of inflation and make better decisions that protect their financial well-being. An informed citizenry is more self-reliant and better prepared to adapt to inflation.

By taking these steps, South Carolina can foster a more resilient, competitive economy that allows market forces to work efficiently, promoting stability and reducing the negative impacts of inflation. The state’s role should be to remove unnecessary obstacles, promote competition, and allow the market to adjust to economic realities.

Inflation is a complex phenomenon with multiple causes but, at its core, stems from imbalances in the money supply, demand, and supply-side factors. While inflation may be a reality we have to deal with, by understanding its dynamics and being financially prudent, we can better weather the storm.