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For the first time in nearly 25 years, the state of Alaska has a new comprehensive intrastate cost differential study to measure real costs of living in various parts of the state.
New study improves state's ability to measure cost of living 082609 BUSINESS 1 Alaska Journal of Commerce For the first time in nearly 25 years, the state of Alaska has a new comprehensive intrastate cost differential study to measure real costs of living in various parts of the state.
Wednesday, August 26, 2009

Story last updated at 8/26/2009 - 2:10 pm

New study improves state's ability to measure cost of living

For the first time in nearly 25 years, the state of Alaska has a new comprehensive intrastate cost differential study to measure real costs of living in various parts of the state.

"Although the primary purpose for updating the study was to help the state equalize pay for state employees, it will also be useful to individuals and organizations because of its comprehensiveness," writes state labor economists Neal Fried and Dan Robinson in the August edition of Alaska Economic Trends.

The study will answer almost any cost of living question that involves comparing the costs of one part of the state with another, whether it be a broad overall comparison of costs or a more detailed look at costs for food, clothing, housing, transportation, medical care or any of a number of other specific categories," Fried and Robinson said.

Although energy costs have received much of the attention in recent years, over the longer term nothing rivals the increase in health care costs. Since the mid-1980s, the cost of health care has risen more than twice as much as either housing or the broad all-items index, the economists said.

The study was complied by the McDowell Group, a Juneau-based research and consulting firm, under contract with the state.

Using data gathered from 2,547 household surveys in 74 communities and 634 retail outlet surveys in 58 communities, the study divides the state into 18 blocks with common demographic and geographic characteristics. Anchorage was used as the base city and assigned a value of 100, from which comparisons of the other areas could be made. The Matanuska-Susitna Borough's index number of 0.95, for example, meaning that living costs there are 95 percent as high as Anchorage's while the Aleutian region's 1.50 index number means costs there are 150 percent as high as in Anchorage.

Other areas where living costs were substantially higher than Anchorage include Bethel and Dillingham, 149 percent; the Arctic region, 148 percent, small communities in Southwest Alaska, 144 percent, roadless areas of the Interior, 131 percent, Kodiak, 112 percent, and Juneau, 111 percent. The new study found that Kotzebue's 161 index number was the highest. Most of the state's remote communities exceeded 130, the economists said.

The report also notes the affect of volatile energy prices on the state's economy.

In Alaska, oil prices are usually discussed in the context of their impact on state revenue and budgets, but with no state sales or income taxes, oil generates the dominant share of what state government spends, the economists said.

Oil prices also have a large effect on consumer prices in a state where heating homes and transporting goods are major expenses. Oil prices shot up above $140 (a barrel) in 2008 before falling back to around $30 later in the same year. Prices are now about $70 per barrel. That unprecedented volatility affected Alaskan's household expenses in a variety of ways.

Fried and Robinson note there are two basic ways to look at the cost of living in Alaska. One is to examine the changes in prices over time. For that, the Consumer Price Index is the most frequently used. It's referred to generically as the inflation rate, and is used to adjust salaries and rents, among other things, so they keep pace with inflation.

The other way to measure the cost of living is to compare the costs of different locations during the same time period. This is the type of information that helps a person trying to decide whether it makes economic sense to relocate from one city to another or a company trying to equalize wages for employees in different cities.

The Anchorage CPI rose 4.6 percent in 2008, the highest annual increase since 1991, before falling to just 1.3 percent in the first half of 2009. Despite the national recession and all the economic uncertainty of the last year, the explanation for both the high 2008 number and the low 2009 number are relatively simple: oil prices and related energy costs, the economists said.

The overall index number is made up of eight different components or categories representing the different goods and services people spend money on. Each of the components is weighted in the overall index according to how large a share it makes up of the average consumer's expenditures. The weights are adjusted periodically based on regular consumer surveys.

Energy costs are not one of the eight separate components of the CPI, but they make up much of the transportation component and also affect, in differing degrees, the other seven components, said Fried and Robinson.

As most consumers can attest, the prices generally move only in an upward direction. Energy costs were an exception in the first half of 2009, providing welcome relief after several consecutive years of big increases. The big decline in oil prices worked its way into significantly lower prices for everything from home heating oil to motor fuel.

Margaret Bauman can be reached at margie.bauman@alaskajournal.com.


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