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Inflation and cost of living: Why hasn’t my index gone up?, 02/08/2022

 

Inflation has been on the rise in countries around the world, in many cases to levels not seen for several decades. This was reflected in ECA’s March 2022 Cost of Living Survey, which saw large rises across the world for food and petrol prices in particular. It is therefore increasingly important that global mobility managers and assignees understand how rising prices will impact their pay.

Despite rising inflation many assignees will have seen their cost of living indices remain relatively stable or decrease. This blog post will explain why.


Inflation is high, so why hasn’t the cost of living index increased?

Cost of living (COL) indices compare costs between two locations. COL indices are used to maintain home purchasing power in the host location, so what happens in the home location will also have an impact on the index. 

Assignees are all too aware of the rising prices they are seeing when they fill up their car or visit the supermarket but fewer are aware of what is happening in their home country. Take an example of an assignee moving from Germany to France. An assignee in France will see prices rising significantly – we measured rises of 5.7% in the year to March 2022 – and maybe surprised that their cost of living index has gone down. This is because prices rose by 6% in Germany over the same period, slightly more than in France.

This decrease in index is not suggesting that prices in France have decreased between March 2021 and March 2022. It is only recognising that prices have increased at a slightly greater rate in Germany than in France during this period. It is important to remember though that cost of living indices will protect home buying power. If the assignee had remained in Germany, they would have faced even higher price rises than they are facing in France and an increase in notional home salary would be required to protect buying power in this case.

 

ECA says inflation is 6% but government data says it is 7%! Why the difference?

ECA’s measures of price changes will differ from figures published by other sources as we are measuring slightly different things. There are many ways to measure price changes and ECA focuses on the spending of expatriates who will often spend their money very differently from the local population, so even though they are seeing the same price rises their experiences will be different. The table below summarises some of the reasons for these differences:

Official inflation<o:p></o:p>

ECA price changes <o:p></o:p>

Based on a lifestyle of a local national of the country

Based on an assignee’s home or an ‘international’ lifestyle

Includes all income groups and family sizes

Reflects the spending of middle to upper income families

Covers a wide range of goods and services many not included by ECA, e.g. housing, car purchase

Covers a specific range of goods and services

Tends to cover the country as a whole

Based on the main cities

Based on shops and brands used by local nationals

Uses shops and brands favoured by expatriates


But inflation in the host location was higher than in my home location, so why hasn’t my cost of living index increased?

There are two factors that affect cost of living indices: relative inflation and exchange rates. If the relative price changes are having a positive impact on the index (host inflation is higher than home inflation) then it must be exchange rates that are causing the lower index.

The current economic turmoil is not just affecting prices but it also having a significant impact on many currencies too. An index will fall if the host currency weakens against the home currency as less home currency money will be needed to buy the same amount of host currency. If the change is big enough it might cancel out even the highest price rises, as it has in Turkey for example.  Despite prices rising by more than 70% in the year to March 2022, most indices for assignees in Turkey will be lower thanks to the weaker lira.

Given the importance of exchange rates to cost of living indices, ECA provides a monthly blog detailing the latest trends in exchange rates.


Inflation is really high! Is my cost of living index out of date?

All ECA cost of living indices are updated at least twice a year but the countries that have the highest inflation are surveyed quarterly. This ensures that there will always be an up-to-date index wherever your assignees are. Our latest interim survey of high inflation countries covered 15 countries, the most for many years: Argentina, Ethiopia, Georgia, Iran, Lebanon, Myanmar, Nigeria, Russia, Sri Lanka, Sudan, Surinam, Turkey, Ukraine, Venezuela and Zimbabwe. 


How can I understand why indices have changed?

ECA provides a wealth of information on how and why its indices change. A recent blog discusses some of the highlights of the recent cost of living survey, looking in some detail at locations that have seen some of the biggest changes. There are also regular blogs on inflation and exchange rate trends around the world so you can know what is happening in plenty of time to respond.

It is also possible for ECA subscribers to see detailed information on why specific indices have changed using the calculators and reports in MyECA. These detail the impact of home and host prices and exchange rates on indices over six and 12 month periods for all ECA indices. The Cost of Living Summary Calculator is a particularly useful tool for looking at these and highlighting the largest changes, which might require a more detailed investigation.

A more detailed explanation of why cost of living indices change is available in the Mobility Basics series of blogs. Please click here to view this post on the ECA website.


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