Bright Lights, Big City, Bigger Prices – Where Inflation Hides

Subdued headline inflation hides the inimitable rise of prices across the country; but ConvergEx’s Nick Colas examines the pace of inflation in four large cities across the US – Boston, Chicago, New York and San Francisco.  All are home to multitudes of urban working professionals, share the same currency and have similar macro economies, though, Colas notes, the trend of price increases varies considerably (particularly with regards to NYC vs. the rest).  The cost of living is up in all four cities since 2008.  Incomes, too, are generally higher – although not in New York, likely a result of the Big Apple’s unique micro economy. Comparatively, New Yorkers have experienced the steepest price increases in transportation (higher cab and subway fares give this category a boost) and groceries, meanwhile rent, dinners out and cocktails continue to be more and more costly.  So what gives?  Rising inflation despite lower incomes?  The answer lies in the tug of war between less cash pay on Wall Street and a very active foreign investment market that is driving up real estate prices.

Via Nick Colas, ConvergEx,

Note from Nick:  New Yorkers often marvel at the low cost of living elsewhere in the country, thinking how “Easy” it would be to just hang it up and live a modest life somewhere in the heartland.  Escape fantasies aside, there is much to learn from comparing price trends across the U.S.  Beth has done such an analysis here, and what pops out is a fascinating study of how inflation works at the “Micro” levels of an economy.

My favorite cut of meat is the filet mignon at Sparks in Manhattan.  It’s $46.95 and well worth every penny.  Alfred’s in San Francisco offers an arguably similar dining experience (though missing is the “cool” factor that comes with eating at the location of an infamous Mafia murder) and quality piece of beef for just $37.  Chicago Chop House’s chateaubriand for two goes for $99, while the signature steak for two at Abe & Louie’s in Boston is only $88.

Varying prices for similar products in different cities is pretty common economic knowledge; it’s a reflection of the distinct micro economies that exist among cities even with congruent macro economies.  Our focus today, however, isn’t on price variations, but rather the difference in price trends.  We’ve chosen the four cities mentioned above – Boston, Chicago, New York and San Francisco – because they all represent tightly clustered urban populations of working professionals.  They are classic examples of what rural folks refer to as “the big city.”

Below are our findings on price inflation in 6 categories that occupy considerable space in a typical urbanite’s budget – housing, transportation, groceries, dinners out, cocktails and entertainment.  All are courtesy of the Consumer Price Index (CPI), except “Entertainment” which we present in the form of Team Marketing Report’s Major League Baseball (MLB) Fan Cost Index, a.k.a. the average cost for a family of four to attend a baseball game.

Category #1 – Residential Real Estate.  Housing costs have increased more in New York and San Francisco than in Boston and Chicago.

• Housing costs (which include utilities, furnishings and supplies according to the CPI) in Boston and Chicago are 2.0% and 2.6%, respectively, higher now than in their peak in 2008, having dipped lower from 2009-2011.  In New York and San Francisco, on the other hand, housing costs never fell below pre-recession levels and are currently a respective 8.2% and 9.4% higher than they were five years ago.
• More recently, year-over-year increases in housing costs in New York (2.4%) and San Francisco (3.2%) trump those in Boston (1.6%) and Chicago (1.9%).  In Manhattan specifically, the average monthly rent for a 1-bedroom, doorman building apartment is $3,900 which is up more than 5% in the past year and more than $600 higher than the recession trough of $3,276 in 2010.  A walk-up studio goes for $2,406 a month, up 10% from last year and almost $500 more than the recession trough of $1,930 in 2010.  See MNS.com for further details, including rents by Manhattan neighborhood, in case you’re in the market for new digs.
• As a side note, the CPI calculates the cost of housing to include utilities, furnishings and supplies, but the main component is called owners’ equivalent rent of primary residence (OER).  Housing units are not in the CPI market basket.  In its survey to determine OER, CPI questionnaire asks consumers who rent their residence simply how much they pay per month in rent, including garage and parking facilities.  For those who own their residence, they must estimate how much they think it would rent for monthly, unfurnished and without utilities.

Category #2 – Transportation.  The price of getting from one place to another is up sharply in all four cities.

• Including public transportation, car rentals, airfare, car repair, etc., transportation costs nosedived in 2009 across the board only to show consistent increases in every year since.
• Price increases since 2008 in New York (17.9%) and San Francisco (16.9%) are higher than in Boston (13.4%) and Chicago (12.4%), though in the past year transportation costs in each city climbed between 2.6% and 2.8%.   It’s worth mentioning that gasoline prices are lower year-over-year in all 4 cities, with NYC and Boston seeing about a 1% decline, while San Francisco and Chicago experiencing declines of more than 5%.

Category #3 – Food.  A trip to the supermarket is increasingly costing more in the east coast cities than in their two counterparts.

• Groceries are getting pricier in New York (+15.2% over the past five years) and Boston (+13.0% since 2008) than in Chicago (+8.0%) and San Francisco (+6.1%).
• Currently through February, grocery shopping cost 1.7% more in Boston than in 2012, making it the city with the biggest year-on-year appreciation.

Category #4 – Eating out.  Surprisingly, restaurant meals are getting relatively cheaper in New York.

• Meals outside of the home increased the least in NYC over the past 5 years, rising 12.3%, compared with 14% gains in Boston and San Francisco and a 16.2% rise in Chicago.
• As for the past year, the price of dinner in a Chicago restaurant jumped 4.0% on average, versus 3.7% in San Francisco and much lower increases in Boston (2.2%) and New York (1.6%).

Category #5 – Martinis and other adult beverages.

• In the past year alone, the average price of an alcoholic beverage rose 2.9% in New York, versus just 1.0% in the other three cities.
• Over the past five years, the price of beer, wine and spirits rose 10.3% in the Big Apple, topped by an 11.9% increase in Boston.  Chicago and San Francisco experienced price increases of 7.2% each.

Category #6 – The national pastime.  And as for baseball, it’s more expensive to see the Red Sox than any other team in MLB, but inflation at Fenway is super low.

• Team Marketing Report’s Fan Cost Index, our proxy for entertainment, compiles the price of four adult tickets, two small draft beers, four small soft drinks, four regular-size hot dogs, parking for one car, two game programs and two baseball caps.  The cost of all this run $377 in Boston, versus $324 to see the Yankees, $298 to catch a Cubs game, and $238 to watch the SF Giants.
• Over the past year however, the cost of attending a baseball game was unchanged to lower in Boston, Chicago and New York, but gained 6.0% in San Francisco.  In the past five years, the price to experience a Red Sox game increased just 5.1%, compared with 17.9% for a Yankees experience, 18.4% to see the Cubs, and 29.5% to watch the Giants.

All of the key ingredients in the cost of big city living are on the rise, but fortunately for Bostonians, Chicagoans and San Franciscans, incomes are increasing too.  As you might’ve expected, incomes dipped across the board in 2009 but rebounded by 2011.  As of last year, incomes in San Francisco County were 9.7% higher than before the financial crisis.  They were 4.1% higher in Cook County (home of most of Chicago) and 3.2% higher in Suffolk County (home of Boston).

For Manhattanites, though, it’s a different story.  Average annual pay in New York County was $98,287 last year, or 2.8% lower than in 2008 when the average worker received $101,084.  So why is the city experiencing rising inflation in light of lower incomes, especially when other big cities across the country don’t have the same disconnect?  Well, incomes are likely lower as a result of less cash pay on Wall Street.  In the aftermath of the Lehman collapse, bankers’ bonuses took a hit, and they were not only lower but a greater portion of bonus pay was in the form of deferred compensation.  Couple this with a strong foreign investment market that is driving up real estate prices in Manhattan, and you’ve got a tidy explanation for an otherwise curious anomaly.

To make some macro sense of all these data points, we end with three conclusions that highlight the dynamics of inflation in the real world.

• First, real estate prices drag up the prices of other goods.  We’ve already covered the residential aspect, but arguably more important is commercial real estate.  And according to the Moody’s/RCA Commercial Property Price Indices (CPPI), commercial real estate prices have been on a steady uptrend since early 2010 and climbed 6.5% in the past year.  While the primary index has yet to reach its peak level from December 2007, it stands 32.3% higher than its trough in January 2010.  And as we’ve seen over the past 5 years, commercial real estate prices move in tandem with residential markets.
• Second, inflation is all about perceptions, particularly at the local level.  Examining inflation on a micro basis is a useful construct that highlights how perceptions of future prices vary across the country.
• And last, the mechanics of inflation are far from uniform across the country.  Various factors drive inflation, and while the CPI measures price changes on a national level, inflation is just as much about local markets.  This implies that inflation is perhaps less of a threat to the nationwide economy since individual places have different micro economies and thus different levels of price appreciation.  A whole lot of things have to line up on a national level for there to be widespread inflation.

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