True Cost Of Living Index Research Articles

Regional and income disparities in cost of living changes: evidence from Egypt

ABSTRACT Inflation has been rising in Egypt since 2007, and reached record levels in 2017. It was more pronounced in rural Egypt and likely hurt the poor proportionately more, since rising food prices were a major factor behind higher prices over this period. Moreover, rising prices, as measured by the Consumer Price Index (CPI), do not accurately measure changes in the cost of living. When inflation is high, people resort to substitution to hedge themselves against a declining standard of living. Regardless of price changes, habit formation and taste changes can also render the fixed basket of the CPI less representative over time. To accurately monitor changes in the cost of attaining a given utility level, I constructed True Cost of Living Indices (TCLI) and used them to examine the regional and income disparities in cost of living changes, and the extent of the bias in the CPI. Results confirmed that cost of living increases were higher in rural regions, and that there were far larger regional disparities in cost of living increases over time using the TCLI. The bias in the CPI was quite substantial, ranging from underestimating the change in cost of living by 1.86 percentage points, to overestimating it by 1.05 percentage points, depending on region. Finally, I found strong evidence that households at the bottom of the expenditure distribution fared much worse. Depending on region, cost of living increases were 2.8 to 4.1 percentage points higher per year for the poorest urban households than for the richest, during the period under study.

Estimation of the True Cost of Living Index of food consumption for Chinese urban consumers

This paper studies the True Cost of Living Index (TCLI) of food consumption for all income groups of urban households in China from 1997 to 2012. Based on the Generalised Fechner-Thurstone direct utility function, this paper estimates the TCLI under variable preference assumptions, and also decomposes the total bias of the traditional Laspeyres Price Index (LPI) estimation of TCLI into substitution bias and preference variation bias. For all income group households, the estimated preference variation bias is found to be quite substantial. According to the finding, when it is necessary to apply the cost of living adjustment clause in any public welfare programmes, the TCLI calculation compatible with preference variation may be more appropriate than the usual Laspeyres Consumer Price Index estimation.

Sensitivity of Purchasing Power Parity Estimates to Estimation Procedures and their Effect on Living Standards Comparisons

AbstractThe motivation of this exercise is to compare the Purchasing Power Parities (PPPs) calculated using different procedures and study the sensitivity of global rankings of regions based on living standards to the PPPs used. The empirical comparison involves the GEKS, weighted CPD, GK, EWGK and the True Cost of Living Index (TCLI) based PPP estimation procedures with the Indian Rupee used as the numeraire currency. The published ICP PPPs for 2011 are used as benchmark for the non ICP PPPs obtained in this study. Evidence confirming the “Gershenkeron effect,” that affects the additive GK procedure, is provided. The results suggest that the EWGK PPPs, which are also additive, do not suffer from the extent of bias of the GK PPPs. The paper also provides evidence on the large variation in the TCLI based PPPs across expenditure quintiles originating from variation in preferences between expenditure classes. This suggests departure from the current ICP practice of providing one PPP for the entire country and points to the need to estimate PPPs by different expenditure classes. The empirical evidence points to the rich potential for the rarely used TCLI in future PPP calculations.

A unified framework for the estimation of intra and inter country food purchasing power parities

PurposeThe purpose of this paper is to extend the methodology proposed in Majumderet al.(2012) for the estimation of the item-specific purchasing power parities (PPPs) within countries, to the cross-country context. It estimates item-specific intra-country PPPs (i.e. spatial prices) and inter-country PPPs in a unified framework using unit records of household food expenditures from three Asian countries: India, Indonesia and Vietnam, covering contemporaneous time periods. The study addresses a key limitation of the International Comparison Program (ICP) exercise, namely, that it treats all countries, large and small, as homogeneous entities. Moreover, it directly calculates bilateral PPPs between countries based on their expenditure patterns and prices alone and directly estimates the price-level indices (PLI) and their standard errors, allowing formal tests of the hypothesis of PLI being unity. The usefulness of the estimated PPPs is illustrated by applying them to comparisons of real food expenditures between the three countries, and benchmarking the comparisons with those using the ICP PPPs.Design/methodology/approachThe methodology is based on the fact that a spatial price index can be viewed as a true cost of living index (TCLI). Using a general cost function underlying the Rank 3 quadratic logarithmic systems, the TCLI is calculated for a reference utility level.FindingsThe study provides formal statistical tests of the hypothesis of item invariance of the PPPs. The usefulness of the proposed methodology is illustrated by applying the estimated PPPs in comparisons of food expenditures between subgroups in the three countries. The sensitivity of the expenditure comparisons to the use of item-wise PPPs underlines the need to provide price information on highly disaggregated PPPs to a much greater extent than the ICP has done to date.Research limitations/implicationsThe choice of these three Asian countries was dictated by the fact that, though comparability of items between them remains an issue as with all cross-country comparisons. Also, in the absence of price data, this study followed the practice in Majumder et al. (2012, 2015a, 2015b) in using as proxies the raw unit values of the food items, but adjusted for quality and demographic factors using the procedure introduced by Cox and Wohlgenant (1986) and extended by Hoang (2009).Practical implicationsIt addresses some limitations of the ICP, namely, ICP treats all countries as single entities with the purchasing power of the country’s currency assumed to be the same in all regions within the country, ICP uses the US dollar as the numeraire (this ignores the fact that the PPPs required in bilateral welfare comparisons between developing countries with vastly different consumption habits from the “international norm” are quite different from the ICP PPPs) and ICP uses distribution invariant prices to calculate PPPs, which overlooks the fact that the poor pay different prices from the “representative” individual.Social implicationsThis study highlights the importance of estimating and using item-specific PPPs in cross-country comparisons by formally testing and rejecting the assumption of item invariant PPPs and by providing empirical evidence that they do make a difference to the welfare comparisons between countries. This study provides PPPs based on food items only, which may be more relevant for poverty comparisons.Originality/valueIt introduces, for the first time, the concept of item-specific PPPs between countries as estimable parameters and operationalizes this concept by using them in cross-country welfare comparisons.

Reconsideration of Weighting and Updating Procedures in the US CPI

Summary In 2002, the US Bureau of Labor Statistics (BLS) introduced a supplemental C-CPI-U employing a superlative formula to provide a closer approximation to a cost-of-living index (COLI). This paper focuses on whether the BLS can improve upon the headline CPI-U’s current biennial weight update process, thereby reducing the CPI-U’s growth rate and bringing the index closer to the C-CPI-U. We begin by estimating superlative price indexes for 1999 through 2007 along with indexes based on the constant-elasticity-of-substitution demand model. Our analyses confirm that the consumer expenditure data underlying the CPI imply substantial consumer substitution, implying that the CPI-U’s Lowe index formula yields higher inflation estimates than would a true COLI. Simulating feasible weight update processes, we find that a Lowe index with two-year weight reference periods but annual updating rises by about 0.03 percentage points less per year than the CPI-U. Another 0.01 percentage point on average is subtracted by imposing annual revision with one-year base periods. Thus, indexes with more timely weights may offer improved representation of current price change, as well as closer approximations to a COLI.

Re-examining the Cost-of-Living Index and the Biases of Price Indices

The U.S. CPI is based on the Laspeyres price index, an index type that has an upward Thus, the CPI tends to overstate increases in the cost of living. To address this bias, the Advisory Commission to Study the Consumer Price Index recommended adopting for the CPI a price index, e.g., the Fisher or Tornqvist indices. Under the assumption of homothetic preferences, superlative indices always have smaller substitution biases--hence, are closer to the cost-of-living index (COLI)--than the Laspeyres index, but this assumption implies that: all elasticities equal 1, the true COLI is independent of the utility level (standard of living), and expenditure shares are unaffected by changes in income. These implications are contradicted, however, by all known household budget studies. Therefore, superlative indices are not necessarily closer to the true COLI than the Laspeyres index except in the unrealistic case of homothetic preferences. Under more realistic non-homothetic preferences, expenditure shares vary with and, thus, income is introduced into the superlative indices. This, in turn, could result in biases larger than the Laspeyres substitution bias in the CPI. The Commission did not, however, address this possibility. The Laspeyres index has a larger substitution bias but no bias because it uses fixed expenditure shares. Under plausible conditions, by using a non-homothetic almost ideal demand system (AIDS) model, we carry out empirical simulations that show that the combined substitution and biases of either the Fisher or the Tornqvist index could be either positive or negative--that is, a superlative index could differ even more from the true COLI than is the case for the present CPI. Thus, adjustments resulting from a CPI based on a superlative index could exceed those from using the current CPI, when the combined bias is positive, or could fall below those warranted by the true COLI in the case of negative combined bias. Therefore, the Commission's recommendation for a superlative index CPI formula needs further examination. We propose a theoretically rigorous and practical procedure to determine a COLI free from substitution and bias, using estimated ordinary demand functions without postulating a specific structure of consumer preferences.

On Measuring The True Cost of Living for the Developing Country: Case of Korea

In a rapidly developing country without an adequate mortgage market, it is difficult to impute the cost of owning a home and, as a result, this cost is often omitted from the Consumer Price Index (CPI). To resolve this difficulty, by using an intertemporal consumption allocation model, this paper develops a method for deriving the user cost of owner-occupied housing which is in turn incorporated in the so-called True Cost of Living Index (TCLI). When applied to Korea as an example, the statistical results show substantially higher inflation than previously assumed, indicating the importance of homeownership cost in measuring the standard of living for a developing country. Thus, in both theory and practice, our TCLI based on the Diewert-superlative chain index is superior to the conventional fixed weight CPI, indicating its usefulness not just for Korea but also for other countries [C43, D11, O53]