I'm not sure it's price gouging so much as small stores can't afford to offer the bigger discounts that on line stores can. That don't have the volume of sales that's required to get the better prices for products.
LQS prices have always been higher then other stores, but it serves a nitch. Some people like the higher quality fabrics that they can go to the store, feel and fondle. Other people prefer to trust a manufacturer and just go with the best price.
I personally rarely shop my LQS because of price also. I hit JoAnn's with my coupons.