Geographic Variation in Consumer Prices: Implications for Local Price Indices

There is substantial variation in local prices among states. Research findings have shown as much as a 35 percent difference between price indices for states (McMahon 1991). Yet, these price differences are often not used in comparing the economic status of states, such as comparing per capita incomes or comparing advantages and disadvantages of where to live. It is reasonable that if prices vary among states, they should also vary among locations, such as counties, within a state. There are a number of implications from ignoring these price differences. First, if local prices are positively correlated with nominal incomes, then it means income disparities among counties within a state, and particularly disparities between urban and rural counties, are not as great as unadjusted income numbers indicate. That is, the "rich" counties are not as rich as they appear, and the "poor" counties are not as poor as they appear. Second, omitting price differences between counties misses an opportunity for counties with lower prices to use this fact as an economic development tool. In many states, rural counties have lagged behind urban counties in economic growth. If these rural counties have lower prices, then this finding could be used in advertising for new business locations. Third, many transfer programs, such as Aid to Families with Dependent Children and Food Stamps, pay the same dollar subsidy amount to all recipient households within a state, or, if there is geographic variation, it is only between urban and rural areas. If, indeed, prices vary within a state, then recipients in different locations in the state do not receive the same subsidy in terms of purchasing power. There are two purposes of this paper. First, the paper will develop a methodology for estimating price indices in local areas (counties) within a state. It is assumed this methodology will not be direct data collection. Instead, the method will use local data from the American Chamber of Commerce Researchers Association to form local price indices. Second, as part of this methodology, the paper will examine local variation in a wide set of consumer prices. PREVIOUS WORK Numerous studies and surveys suggest substantial variation in prices among localities in the nation. The first evidence is from direct surveys of prices in different locations in the country. One part of this evidence comes from the, now discontinued, surveys of family budgets conducted by the Bureau of Labor Statistics (U.S. Bureau of Labor Statistics 1982).(1) The final report of these budgets for autumn 1981 showed a 12 percent difference in the budgets between metropolitan and nonmetropolitan areas of the country for a four-person family with an intermediate standard of living. The largest difference existed for rent (27 percent), and the smallest difference was found for clothing, transportation, and food at home (each with a 2 percent difference between metropolitan and nonmetropolitan areas). Furthermore, similar differences were found between metropolitan and nonmetropolitan areas in regions of the country. The American Chamber of Commerce Researchers Association (ACCRA) provides other direct evidence of locational price differences. Each quarter, ACCRA collects price data for 61 products and services in 289 locations across the country. The products and services selected are designed to reflect the consumption pattern of household members with mid-management occupations. ACCRA forms a price index by taking a weighted average of these products and services.(2) The report from the first quarter of 1995 showed a 166 percent difference between the location with the highest price index (Manhattan, New York City) and the location with the lowest price index (Kennett, Missouri). Again, the greatest difference existed for housing, at 526 percent (American Chamber of Commerce Researchers Association 1995).(3) Final direct evidence comes from housing costs collected by the U. …