Understanding the rankings in Mercer's Cost of Living survey
Two main factors determine a city’s ranking in Mercer’s Cost of Living survey:
the relative strength or weakness of the relevant currency against the US dollar over the prior 12 months; and
price movements over the prior 12 months compared to those in New York City as the base.
Let’s consider the example of the six Australian cities covered by the Cost of Living survey, whose changes in rank were most affected by a currency movement:
We sat down with Nathalie Constantin-Metral and Marie-Laurence Sépède to discuss the Cost of Living Survey results for 2011 (Video 4.00 min)
March 2011 rank
March 2010 rank
Change in rank
Sydney
14
24
+10
Melbourne
21
33
+12
Perth
30
60
+30
Brisbane
31
55
+24
Canberra
34
74
+40
Adelaide
46
90
+44
All six cities jumped at least 10 places between their 2010 ranking and their 2011 ranking – and two, Canberra and Adelaide, jumped 40 or more positions. This movement is due primarily to the recent strength of the Australian dollar, which appreciated by almost 14% against the US dollar over the 12 months considered. Consequently, a New York City assignee would need more US dollars to purchase a similar basket of goods and services in Australia, and the Australian cities’ rankings all went up.
Another element that will affect a city’s position in Mercer’s Cost of Living ranking is local price movements, compared to the price movements in New York City. If prices increase more in a surveyed city than in New York City, the cost of living there becomes more expensive, so that city will go up in the ranking. For example, there has been no currency variation between the US dollar and the Bolivar fuerte, as the Venezuelan currency is fixed to the US dollar. Yet Caracas witnessed high price increases on the Mercer basket of goods and services between March 2010 and March 2011 edition, so it jumped 49 places, from 100 to 51, in the 2011 ranking.
Despite flat currency fluctuation and small price movements, cities’ ranks can change based on the movement of other cities in the ranking.
The effect of currency fluctuations on rankings
Let’s look at the currency variations between March 2010 and March 2011 surveys.
Generally, currency fluctuations have remained moderate during the period March 2010 to March 2011. But the US dollar has weakened significantly against some currencies, including the Singapore dollar, the Brazilian real, and the Malaysian ringgit. So the Cost of Living indices for US expatriates will continue to increase to reflect the need to use more US dollars to buy the same number of host currency units. The table below illustrates how the ranking of cities changed due to a weaker US dollar in the affected countries.
March 2011 rank
March 2010 rank
Change in rank
Singapore
8
11
+3
São Paulo
10
21
+11
Rio de Janeiro
12
29
+17
Brasilia
33
70
+37
Kuala Lumpur
104
138
+34
The converse is also true. US expatriates that saw their currencies appreciate towards the host country currency are likely to see a lower index. The reason is simple: A currency that appreciates means that one needs fewer home currency units to purchase the same number of host currency units.
Some currencies have devaluated against the US dollar over the twelve months considered, such as the Guinea franc and the Ethiopian birr. Consequently, Conakry, Guinea, dropped from 110 to 155 and Addis Ababa, Ethiopia, dropped from 208 to 211 from March 2010 to March 2011.
Price movements
Generally, price increases as measured by the movement in local currency of the Mercer cost of living basket remained moderate for the 12 months considered. What inflation there was has been mainly driven by gasoline price increases. Taxes also affect purchasing power, and a number of countries (mostly in Europe) have increased their VAT rate between March 2010 and March 2011.
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