Oh FFS, Not Again: The Economist Worldwide Cost of Living Index is Not a Cost of Living Index

So every six months it seems The Age re-runs what is essentially the same story as the latest incarnation of The Economist Intelligence Unit’s Worldwide Cost of Living Index is released.

In the most recent of these, they lead with a typically startling claim:

It’s cheaper to live in Copenhagen, Hong Kong or New York City than it is to reside in Sydney or Melbourne, according to the Worldwide Cost of Living Index compiled by the The Economist’s intelligence unit.

Really? But hang on a minute, what’s this:

Sydney ranked fifth and Melbourne equal sixth on the list, released on Tuesday, US-time. That was actually a drop of two ranks for each city since the last survey was released last year.

Jon Copestake, the editor of the index, said a recent decline in the Australian dollar meant that Australian cities in 2014 offered slightly better value for money, resulting in their slight drop in rankings.

“The long-term rise of the Australian dollar, which has doubled in value in the last decade, has fallen back lately, with a corresponding decline in relative prices,” he said.

Well that’s interesting: why would the recent drop in the Aussie dollar make Melbourne and Sydney slightly better value places to live? If I live in Melbourne and earn money in local currency, then why would a fall in the value of the Aussie dollar make it cheaper to live here? Wouldn’t a weaker dollar make it more expensive in some respects, pushing up the price of imported goods, for example?

Maybe it’s because (as I wrote back in 2011) The Economist Intelligence Unit’s Worldwide Cost of Living Index is not really a cost of living index at all. As the report itself says:

The Worldwide Cost of Living survey enables human resources line managers and expatriate executives to compare the cost of living in over 130 cities in nearly 90 countries and calculate fair compensation policies for relocating employees.

Everything is converted back into US Dollars. Any movement in the position of Australian cities is almost entirely a result of exchange rate fluctuations. As the Aussie dollar got stronger, those cities rocketed up the list. And now that the Aussie has weakened they are slowly falling back.

It’s really a cost of relocating from the US and paying for things with US dollars survey. Which is perfectly fine if you use it for the purpose it is intended to be used for, but you can’t take the information in the report and try to draw conclusions for people who already live in those cities and earn money in local currency.

I don’t doubt that Sydney and Melbourne belong somewhere high up on a list of expensive cities in the world, but I strongly suspect that their average wages would also put them pretty high up on a list of the richest cities in the world.

And if you don’t look at the cost of living as a proportion of average wages then your results are utterly meaningless.