Regional Price Parities – 2017

By , May 23, 2019 5:20 PM

The Bureau of Economic Analysis came out with their latest figures on real personal income for states and metropolitan areas last week.  A distinctive feature of these “real” income estimates is that they are adjusted for changes in prices that reflect not only the national inflation rate, but differences in local and regional price levels as well.  The annual report on real incomes therefore provides an annual reminder that Arkansas’ low cost-of-living is a partial offset to our state’s relatively low income levels.  In the latest report, covering 2017, Arkansas was once again near the bottom of the list, with the second-lowest Regional Price Parity (RPP) in the nation.  Arkansas’ RPP of 86.5 means that prices are 13.5% below the national average.  The lowest RPP in 2017 was Mississippi (85.7) while the highest was Hawaii (118.5).

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

One of the key implications of the RPP statistics is that after adjustment for differences in the cost of living, Arkansas personal incomes are closer to the national average than simple dollar-value comparisons suggest.  As shown in the figure below, nominal (dollar-valued) income in Arkansas is more than $10,000 lower than the national average.  After accounting for price-level differences, the gap closes to less than $4,000 (in 2012 inflation-adjusted dollars).  In comparisons among the 50 states, Arkansas ranks #46 in nominal per capita income.  After adjusting for the cost of living, Arkansas ranks #39 .

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

As a percent of the nationwide average, Arkansas per capita income is approximately 80% of the U.S. in dollar terms, but is over 92% after adjustment for price differences.  Comparisons with the national average are boosted by relative-price adjustments in all parts of the state — some more than others.  In non-metropolitan areas of the state, nominal incomes are only 64% of the U.S. average while real incomes are 78%.  The overall figures for Arkansas’ metropolitan areas are 89% for nominal income and 101% for real income — after adjusting for price differences, the standard-of-living in Arkansas metro areas is actually higher than the national average.  Differences among metro areas are also significant.   Per capita personal income in Northwest Arkansas is above the U.S. average in both nominal and real terms, whereas Pine Bluff has nominal incomes that are only 64% of the U.S. in dollar terms and 78% after adjusting for prices.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

The price indexes used to make these adjustments are broken down into three categories: Goods, Rents, and Other Services.  Arkansas prices in all categories are below the national average, but Rents are particularly low in Arkansas — especially in non-metropolitan areas of the state.

RPP2017-tab

Because the RPP statistics compare local prices to the nationwide average, it is possible to string together changes in RPPs along with changes in the U.S. overall price index to generate statistics on local price changes (loosely speaking, local inflation).  The figure below shows the annualized rates of price change over the 5-year period from 2012-2017.  The rates of price-level changes in Arkansas have generally been lower than the U.S. inflation rate of 1.2%.  The only exceptions are Hot Springs and Jonesboro, where local inflation rates have been approximately 1.3%.  The lowest rate of price-change in the state was in Pine Bluff, where annual local inflation has averaged only 0.6% per year.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

Finally, the whole point of this exercise is to measure the growth rate of real, inflation-adjusted incomes.  In 2017, nominal per capita income growth was 3.3%, slightly below the national average rate of 3.6%.  But with slower growth in prices, more of Arkansas’ growth translates to real income gains:  After price adjustment, real per capita income growth in Arkansas was 2.3% compared to 1.9% for the U.S.  Among Arkansas’ metro areas, Hot Springs had the highest nominal growth rate (3.9%), but relatively rapid price increases (2.8%) diminished the purchasing power of those gains, resulting in real growth of only 1.1%.  Non-metropolitan regions of the state experienced smaller price increases than the metropolitan areas, yielding real per capita income growth of 3.3%.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

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