Measuring Inflation

By Dave Senf
September 2011

PDF of article

A new regional price index helps compare how much it costs to live in different cities and regions of the United States.

Inflation hasn’t been a major problem in the United States since topping out at 13.5 percent at the tail end of the Carter administration in 1980. In more recent times inflation has been relatively tame, averaging 1 percent to 3 percent annually in the U.S.

Nonetheless, it remains a valuable measure that people use to determine everything from alimony and child-support adjustments to wage growth and how much their Social Security checks will increase in the next year.

While Minnesota’s inflation rate tends to be lower than the national average (but higher than surrounding states), the Twin Cities has tracked fairly closely to the U.S. inflation rate over the past 25 years.

Figure 1 compares the annual inflation rate for the U.S. and Twin Cities since 1985 based on the consumer price index for urban households (CPI-U). The inflation rate was higher in the Twin Cities than the rest of the country in 13 years, lower in 11 years and the same in two years. The yearly differences have almost balanced out over the years, with the Twin Cities CPI increasing 98 percent between 1985 and 2010 compared with 102 percent nationally. This means that the price level in the Twin Cities almost doubled during the last 25 years. Anyone making $30,000 a year in 1985 would need to make $59,400 in 2010 to have the same purchasing power.[1]

Consumer price indexes help to compare how quickly prices have been changing in different geographic areas, but they aren’t much help in comparing the cost of living across geographic areas. The CPI for the Chicago metro area also increased 98 percent over the last 25 years, but that doesn’t mean a household income of $80,000 in the Twin Cities will buy the same standard of living in Chicago. Questions about differences in price levels across geographic areas can now be tackled free of data subscription costs thanks to new regional price indexes created jointly by the Bureau of Economic Analysis (BEA) and the U.S. Bureau of Labor Statistics (BLS).

BEA researchers examined the more than 1 million price quotes on hundreds of consumer goods and services collected by the BLS nationwide each year, added in 3 million observations on rental payments from the American Community Survey, and then applied some fancy statistical tools to estimate place-to-place price indexes. Regional price indexes are available for all states and 366 metro areas.[2] Figure 2 displays where Minnesota’s regional price index falls among selected states. For now the regional price indexes — termed regional price parities (RPPs) by the BEA — are averages of 2005 to 2009 prices. The RPPs compare the price level of states and metro areas to the average national price level for all reference areas.

The national price level is set at 100, while state and metro price levels are expressed as a percentage of the national average price level. Minnesota’s RPP of 95.6 indicates that the price level here is 4.4 percent lower than the national price level. The living is even cheaper in neighboring states. South Dakota has the lowest price parity of all states: 16.2 percent lower than the national average. Hawaii has the highest price level: 18.5 percent above the national level.  Minnesota’s RPP is higher than all of the neighboring states, indicating that the cost of living in Minnesota is higher than in the surrounding states. Compared with Minnesota, the price level is 12.3 percent lower in South Dakota, 11.6 percent lower in North Dakota, 8.9 percent lower in Iowa and 4.4 percent lower in Wisconsin. A winter without being trapped in a parka doesn’t come cheap. Minnesota’s price level is 19.3 percent lower than the price level in Hawaii, 16.7 percent lower than California, 4.5 percent lower than Florida and 4.5 percent lower than Arizona.

Compared with the rest of the nation, Minnesotans enjoy bargains on most goods and services, but they pay more for education, food, medical goods and services, other services, and recreation goods. Table 1 displays Minnesota’s five-year RPPs across nine expenditure categories. Rents vary the most nationwide, while transportation goods have the lowest variation. Services tend to show more geographic variation than goods, which is consistent with goods being traded nationally and services being provided mostly locally.

These new measures of place-to-place price indexes are useful in judging how a new job offer in the Twin Cities would stack up with a similar job in other metro areas of the state. If you’re making $50,000 in Mankato, then the new job offer in the Twin Cities needs to be around $59,800 in order to have the same standard of living as in Mankato. The cost of living in the Twin Cities is 19.6 percent higher than in Mankato.  

Figure 3 displays the RPPs for Minnesota metro areas along with metro areas with the lowest and highest RPPs nationwide. A salary of $50,000 in Cape Girardeau-Jackson, MO-IL buys the same standard of living as a $63,200 job in the Twin Cities. Keeping the same standard of living that a job paying $63,200 provides in the Twin Cities would require a job paying $79,100 in the posh Bridgeport-Stamford-Norwalk, CT area. That region’s RPP is roughly 25 percent higher than the Twin Cities price level.

The new BEA regional price indexes offer an alternative to the only other broadly based regional price index, the ACCRA Cost of Living Index available for purchase from the nonprofit Council for Community and Economic Research. [3] The ACCRA index was initiated in 1968 and depends on the voluntary efforts of price data collectors in roughly 300 metro areas to gather the cost of 60 goods and services.

Besides the obvious difference in the price data underlying the two indexes, there is a major difference in the basket of goods and services that the two indexes attempt to compare. The ACCRA Cost of Living Index is designed to compare the regional cost differences for expenditures by professional and executive households in the top income quintile. The BEA regional price index is designed to measure the differences in regional price level for an average household.

The two index models will be increasingly compared as the BEA regional price index becomes more familiar. With its ability to illustrate differences in price levels over a specific time period for the middle class, the BEA model will contribute to our understanding of what it costs to live in various areas of the country.

The two index models will be increasingly compared as the BEA regional price index becomes more familiar. With its ability to illustrate differences in price levels over a specific time period for the middle class, the BEA model will contribute to our understanding of what it costs to live in various areas of the country.

[1] The Bureau of Labor Statistics has a CPI inflation calculator at www.bls.gov/data inflation_calculator.htm that allows price comparisons back to 1913.
[2] For more details, see “Regional Price Parities by Expenditure Class, 2005-2009” by Bettina H. Aten, Eric B. Figueroa and Troy M. Martin in the Survey of Current Business, May 2001, www.bea.gov/scb/pdf/2011/05%20May/0511_price_parities.pdf.
[3] More information on the ACCRA Cost of Living Index can be found at www.coli.org/. Cost of living index calculators based on the ACCRA data are available at several websites, including http://cgi.money.cnn.com/tools/costofliving/costofliving.html.

Top