We know the cost of living varies considerably across the country. It can even vary significantly just across town. But what really drives these differences? In a word, housing. Sure, the price of going out to eat can vary by a few bucks per plate here and there, plus we know haircuts and accounting services differ as well. But as seen in this edition of the Graph of the Week, prices across the country for most goods and services fall within a range that varies by 20 percent or so. Of course that’s nothing to sneeze, especially if incomes don’t keep pace. However the variation in costs for most goods and services pales in comparison to the differences seen in housing costs which can vary by 200 percent.
Housing represents a big component of consumer spending and inflation overall of course. In Detroit and St. Louis housing accounts for around 40% of the local CPI basket, while it is nearly 50% in New York and San Francisco. Before BLS murdered the Portland-Salem CPI, housing was 45% of the basket, on par with Denver and Seattle.
Part of the reason housing costs vary so much is demand, a lot of people want to live in the large urban areas with strong economies and a high quality of life. However we also know a key reason is the low levels of supply or lack of new construction. As Tim Duy and I wrote a few years back, expensive cities don’t built much housing, for a variety of macro reasons in addition to local policies.
That said, we need to keep in mind that housing isn’t the only thing impacting household budgets. Non-housing items account for 50-60% of the CPI basket and more like 80% of consumer spending overall. So even as we spend most of our money elsewhere, it is clear that housing differences are the key driver behind the overall cost of living.
Finally, as an aside, product availability and not just prices matter when it comes to quality of life as opposed to cost of living. If you are craving Peruvian food or northern Indian food or the like, those types of restaurants may not be in every city. This is true even if the number of restaurants or number of restaurants in a broad category like Asian is the same. This added wrinkle matters at the personal level and may affect how you feel about a certain city, but will definitely be missed at the macro level when we look across the country using standard economic measures.