Inter-city indexes of price differentials, of consumer goods and services

Methodology

In order to produce optimal Inter-city indexes, product comparisons were initially made by pairing cities that are in close geographic proximity. The resulting price level comparisons were then extended to include comparisons between all of the cities, using a chaining procedure. The following initial pairings were used:

Reliable Inter-city price comparisons require that the selected products be very similar across cities. This ensures that the variation in index levels between cities is due to pure price differences and not to differences in the attributes of the products, such as size and/or quality.

Within each city pair, product price quotes were matched on the basis of detailed descriptions. Whenever possible, products were matched by brand, quantity and with some regard for the comparability of retail outlets from which they were selected.

Additionally, the target prices for this study are final prices and as such, include all sales taxes and levies applied to consumer products within a city. This can be an important source of variation when explaining differences in inter-city price levels.

It should be noted that price data for the Inter-city indexes is drawn from the sample of monthly price data collected for the Consumer Price Index (CPI). Given that the CPI sample is optimized to produce accurate price comparisons through time, and not across regions, the number of matched price quotes between cities can be small. It should also be noted that, especially in periods when prices are highly volatile, the timing of the product price comparison can significantly affect city-to-city price relationships.

The weights used to aggregate the different product indexes within a city are based on the combined consumption expenditures of households living in the 11 cities tracked. As such, one set of weights is used for all 11 cities. Currently, 2011 expenditures are used to derive the weights. These expenditures are expressed in October 2014 prices.

The Inter-city index for a particular city is compared to the weighted average of all 11 cities, which is equal to 100. For example, an index value of 102 for a particular city means that prices for the measured commodities are 2% higher than the weighted, combined city average.

Additional Information on Shelter

Shelter prices were absent from the Inter-city index program prior to 1999 because of methodological and conceptual issues associated with their measurement. The diverse nature of shelter means that accurate matches between cities are often difficult to make.

To account for some of these difficulties, a rental equivalence approach is used to construct the Inter-city price indexes for owned accommodation. Such an approach uses market rents as an approximation to the cost of the shelter services consumed by homeowners in each city. It is important to note that this approach may not be suitable for the needs of all users. For instance, since the rental equivalence approach does not represent an out-of-pocket expenditure, the indexes should not be used for measuring differences in the purchasing power of homeowners across cities.