Arkansas Economic Development Institute

Posts tagged: Inflation

Regional Price Parities and Real Personal Income – 2015

By , June 23, 2017 10:07 AM

Arkansas is a relatively low income state, but it is also a state with a very low cost of living.  A dollar of income supports more real spending in Arkansas than it would in other, more expensive parts of the country.  New data from the Bureau of Economic Analysis documents the low cost of living in Arkansas using measures known as Regional Price Parities (RPPs).

RPPs measure the average price of goods and services in a geographic region compared to other regions in the U.S.  The figure below displays these measures for the 50 states and the District of Columbia, as of 2015.  The most expensive state in the nation is Hawaii, with prices that are 18.8% above the national average.  At the other extreme, the cost of living is only 86.2% of the national average in Mississippi, almost 14% below average.  Arkansas comes in at #3 on the list of states with the lowest cost of living, with a RPP of 87.4.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

While the cost of living is lower in all areas of the state, there are differences among the RPPs for regions within Arkansas.  As shown in the following table, the cost of living is highest in the Northwest and Central Arkansas metropolitan areas.  Nonmetropolitan areas of the state have a RPP of 83.9, implying a cost of living that is 16% below the U.S. average.  Among metro areas, Jonesboro is the least-expensive place to live.  In fact, Jonesboro’s RPP ranks it with the 7th lowest cost of living among all 382 of the nation’s metropolitan statistical areas.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

The table also shows that differences in rents–or housing costs more generally–drive the overall differences in cost of living.  Goods prices tend to vary relatively little in different parts of the country.  The cost of services, which have a significant locally-produced content, vary more substantially.  Rents, on the other hand, are entirely local prices and therefore display the largest region-specific component.

Real Income and Local Inflation
By adjusting incomes in states and regions for differences in cost of living, RPPs can be used to calculate measures of purchasing power that provide real (price-adjusted) measures of income.  Typically the term “real income” is used to describe measures that are adjusted for inflation, or price differences over time.  In the context of RPPs, the adjustment covers differences over both time and space.

In the latest data, for instance, the RPP for Arkansas rose from 87.1 in 2014 to 87.4 in 2015.  Because the RPP for the entire U.S. is 100, by definition, this means that prices in Arkansas rose by 0.3 percentage points more than for the nation as a whole.  U.S. inflation was 0.3% in 2015 (as measured by the implicit price deflator for personal consumption expenditures) so Arkansas’ inflation rate was about double the national average for that year.  Actually after rounding to the nearest one-tenth of a percentage point, the inflation rate implied by Arkansas regional price deflator was 0.7%.  Other states’ regional price adjustments indicated inflation rates ranging from 1.2% in North Dakota to -0.7% in Delaware.

The figure below illustrates the varying path of price-level changes in Arkansas compared to the national average.  The U.S. the data are annual percent changes in the implicit price deflator for personal consumption expenditures.  For Arkansas, the data represent implicit price deflators based on the annual RPP statistics.  The two measures of “inflation” track fairly closely over time.  Over the five-year period, cumulative compounded price changes totaled 9.5% for the U.S. and 10.6% for Arkansas, implying that the cost of living in Arkansas was rising slightly toward the national average, on net.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

The following table shows the growth rates of total personal income and real personal income in Arkansas, adjusted for differences in inflation and regional prices.  The table decomposes total income growth from 2014-15 into real and inflation components (the percent growth columns).  For Arkansas statewide, nominal (dollar) income rose 2.2%, with 1.4% attributable to real income growth and 0.7% to overall price increases (with the remainder due to rounding error).  The highest real income growth rate in the state was in the Fayetteville metro area, with 3.7% nominal income growth and 0% inflation.  Nominal income in Pine bluff increased only 0.1% in 2015 but prices declined by 0.5%, resulting in an increase in real income of 0.6%.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

Real Per Capita Income
One commonly used measure of local economic well-being is per-capita personal income.  In dollar terms, per capita income in Arkansas was $38,257 in 2015, which amounted to just under 80% of the national average.  When we take into account the higher purchasing power of incomes in Arkansas, real per capita income is over 91% of the national average.  The table below shows how the adjustment for purchasing power changes the relative standards of living implied by per capita incomes in Arkansas’ metro areas.  The accompanying figure illustrates the differences among areas.

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

The highest per capita income in the state is in the Northwest Arkansas metro area.  In dollar terms, per capita income is 9% above the national average. After taking account of the fact that the cost of living is over 10% below the national average, per capita income in the Fayetteville metro area is 22% above the national average–in terms of purchasing power and standards of living.  The very low cost of living in Jonesboro has a particularly large impact on this real income comparison.  In dollar terms, per capita income in Jonesboro is only 70% of the U.S. average, but after adjusting for prices it amounts to 86%.

Real Personal Income and Purchasing Power, 2007-2011

By , June 13, 2013 9:10 AM

The Bureau of Economic Analysis (BEA) released a brand new set of data yesterday:  Real Personal Income for States and Metropolitan Areas, 2007-2011 (Prototype Estimates).  The data are not as timely as those we usually cover here on the Arkansas Economist, but they are rich in detail.

When economist refer to “real” magnitudes, it means that the data have been adjusted to reflect price differences.  Typically this involves adjusting “nominal” growth rates to account for changes in the price level over time — i.e., inflation.  What is truly novel about the prototype estimates that came out yesterday is that they are also adjusted to reflect differences in relative price levels from one region to another.

As described in a previous post, the BEA’s new set of Regional Price Parities (RPPs) are intended to measure differences in the cost of living across states and metro areas.  Hence, the “real” personal income statistics released yesterday convert dollar-denominated figures into units of current local purchasing power.

As shown in Figure 1 below, the cost of living varies considerably among the states.  In 2011, the RPP for Arkansas was 89.2, meaning that prices in Arkansas are more than 10% below the national average (which is equal to 100, by definition).  The highest prices in the nation are in Hawaii (116.0) and the lowest are in South Dakota (87.0).  In the 2011 data, Arkansas ranked as having the 5th lowest prices in the nation.

Figure 1:

Source: Bureau of Economic Analysis

As shown in Figure 2, RPPs do not vary much over time, but they do differ even among areas within the state.  As of 2011, the average RPP for metropolitan areas in Arkansas was 90.9, while the non-metro RPP was only 85.5.

Figure 2:

Source: Bureau of Economic Analysis

To the extent that RPPs do vary over time, increases or decreases can be interpreted (roughly) as indicating a higher or lower rate of inflation than the national average.  Typically, nominal growth rates are converted to real values by simply adjusting for the nationwide inflation rate.  By using the RPP adjustments, the real income calculations reflect a more accurate and nuanced measure of income that better reflects purchasing power at the local level.  Figure 3 shows changes in personal income in Arkansas — and for its metro and non-metro areas — from 2008 through 2011.  The recession of 2008-09 is reflected in the negative growth rates in 2009.  Statewide, real income declined by 2.5%, but the downturn was sharper (-3.3%) in the non-metro areas of the state than in the metro areas (-2.1%).  During the recovery in 2010 and 2011, total metro-area income has grown faster than non-metro income.

Figure 3:

Source: Bureau of Economic Analysis

However, there is one additional adjustment that is necessary to evaluate how incomes support real purchasing power:  population growth.  If real income in an area is rising simply because there are more people earning the same amount per person, then living standards have not really improved.  Consequently, the best measure of overall economic welfare is “real per capita personal income,” displayed in Figure 4.

Figure 4:

Source: Bureau of Economic Analysis

In general, the metro areas of the state have been growing in population, while the non-metro regions have experienced slower growth — or even outright population declines (see Arkansas Population Estimates for 2012).  Figure 4 shows that these changes in population are important.  In real per capita terms, the recession hit metro and non-metro areas about equally, and the recovery has been slower in metro areas.  In fact, metro area per capita real income declined in 2011, pulling the statewide average negative.  Non-metro areas displayed a small but positive growth rate.

The most significant implication of using RPPs to adjust nominal incomes is how it affects comparisons of the relative purchasing-power of incomes.  It is often noted that Arkansas is far below the national average of per capita income.  However, when regional differences in prices are taken into account, the standard of living in Arkansas is much closer to the national norm.  In nominal terms, Arkansas per capita income was only 81% of the U.S. average in 2011.  But after adjusting for price differences, real per capita income (RPP-adjusted) was 91.2% of the national average.  The adjustment for relative prices moves Arkansas up in the rankings among the 50 states plus D.C. from #46 to #41.

Figure 5:

Source: Bureau of Economic Analysis, with calculations by IEA.

Although the adjustment of per capita income using RPPs brings the statewide standard of living closer to the U.S. average, there remain significant differences between the metro and non-metro areas of the state.  As of 2011, real per capita personal income in Arkansas’ metro areas was 95.7% of the U.S. average, while the corresponding figure for the state’s non-metro areas was only 84.5%.

Metropolitan Areas
The RPP data in yesterday’s report are also broken down by individual Metropolitan Statistical Areas (MSAs).  Even among the various MSAs, Relative Price Parities differ considerably (Figure 6).  Prices are higher in the larger MSAs of Memphis, Little Rock, and Fayetteville.  The smaller metro areas have prices that are comparable to the non-metro areas of the state.

Figure 6:

Source: Bureau of Economic Analysis

Real per capita income growth rates in Figure 7, below, reveal an uneven pace of recovery among the state’s metro areas during 2010 and 2011.  In 2010, the negative growth in total metro area income (shown in Figure 4) was concentrated entirely in three MSAs:  Fort Smith, Little Rock, and Jonesboro. Growth was positive in Arkansas’ other metro areas.   In 2011, however, growth rates were positive for all areas of the state.

Figure 7:

Source: Bureau of Economic Analysis

Finally, how do the state’s MSAs stack up in terms of real per capita personal income, adjusted for purchasing power?  Figure 8 shows that even though prices tend to be higher in larger metropolitan areas, higher incomes tend to compensate for the differences.  In dollar terms, incomes in Arkansas MSAs range from 74.3% of the national average in Pine Bluff to 96% in Little Rock.  After adjusting for relative prices, the real per capita income figures show that Little Rock has a standard-of-living slightly above the national average.  Pine Bluff remains the MSA with the lowest relative income level, but the standard of living is nearly 11 percentage points higher than the nominal, dollar-denominated figures suggest.

Figure 8:

Source: Bureau of Economic Analysis, with calculations by IEA

The new RPP data have now moved from the experimental phase to prototype.  There are likely to be further refinement in the methodology and coverage of the data, but it is extremely useful to now have an official set of measurements for geographic relative price differences.  As detailed here and in yesterday’s report from the BEA, the new data bring a novel perspective to the examination of income differences across the nation and within the state of Arkansas.

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