Every State Has Its Price
By: Lyman Stone
Tags: Economics, Game of Thrones, Migration, Housing, Urbanism

Every State Has Its Price

A Look at BEA’s Regional Price Parities

BEA recently released the 2014 data for their Regional Price Parity series. This data series tracks cost of living for “parity” goods and services across states and metro areas. Much of its conclusions are driven by housing, but not all.

Prices vary widely across the US. But here, let me just share the map the Tax Foundation made, because they do a good job:

As you can see, there are big price differences around the country, from expensive New York and California, to much less costly Arkansas and Mississippi. These cost differences partially offset often-observed income differences between some of these states, such that real income varies less between states than nominal income, as much of the higher income earned in richer states and cities is just poured into paying higher prices. Ultimately, the only people who reliably enjoy higher real incomes in the richer states are people who own lots of rental property.

But the Tax Foundation covers that stuff pretty well. I want to look at something else.

The BEA publishes this data annually because, no surprise here, it changes. Because there’s inflation, prices change, and they don’t change at the same rate everywhere. Now, there’s a fun argument that can bubble up from the wells of economic history about the geographic distribution of price changes due to monetary supply shocks *coughCantillonEffectscough*, I really just want to illustrate how prices have changed at different rates in different states.

So, let’s illustrate!

The above map shows in darker colors states with a larger increase in cost of living, and in lighter states with a smaller increase. Of course, the fastest increase of all wasn’t in any state, but in the District of Columbia, too small to see here. DC’s price deflator rose 13.3 points. It went from being the second highest-priced area in 2008 (behind only Hawaii), to being the highest priced place as of 2014. Congrats, DC, you’re not just expensive, but you’re getting moreso, and fast! Prices also rose by a large amount in New Jersey, North Dakota, New York, Colorado, Maryland, West Virginia, Vermont, and Washington.

Meanwhile, the slowest price increase was in Arizona, followed by Nevada. Both had middling-level prices in 2008, and now have just a bit-below-middling prices. Major declines in housing prices are probably at work here, as Nevada and Arizona have both seen fairly fast price rises in the last 2 years. Other lower-price-increase states were Idaho, Georgia, Michigan, Ohio, Montana, Florida, Rhode Island, South Carolina, and New Hampshire.

But it should be noted, every state saw rising prices over the period. Arizona rose from a deflator index of 100.4 to 105. DC rose from 115.4 to 128.7. The cheapest state in the union, Mississippi, rose from 86.2 to 94.5. There have been no inflation-proof states.

The headline IRPD doesn’t let us break out subcomponents. But if we look at just the regional price parity core data, we can, so let’s do that. Let’s see what’s driving these trends.

First of all, we need to look at the headline regional price parity. The RPP differs from the IRPD because, each year, the RPPs are calculated fresh, showing each state’s price level as a ratio of the national average price level. So for example, West Virginia’s RPP in 2008 was 87, meaning its cost of living was about 87% of the national average. In 2014, its RPP was 88.9, meaning it had risen to about 88.9% of the national average; i.e. West Virginia got more expensive compared to the rest of the nation.

States colored in red saw their price relative to the national average rise, while states colored in blue saw their relative prices fall. In other words, even though there was inflation around the country, meaning that prices were higher everywhere, prices were a lot higher in, say, North Dakota, but only a little higher in Nevada, compared to the national average.

RPPs are pretty stable. As you can see from the scale, most states had less than 1 percentage point change in relation to the national average. By and large, local area price levels are not exceptionally volatile, but reflect enduring differences in local economies. That said, which states are cheap and which are not can and probably will change over time.

But what drives that change? Well, unlike the IRPD, the RPP is broken out by some categories.