Arkansas’ cost of living among lowest in the U.S., Commerce Department report says

A garment factory worker in Arkansas making $35,000 a year has the same purchasing power of a pineapple farmer in Hawaii with annual income of about $48,000, according to a recently released report on the regional cost of living by the U.S. Department of Commerce.

That is a nice way of saying that the cost of living in Arkansas is a lot cheaper than Hawaii, New York, California and others states listed at the top of the Commerce Department’s Bureau of Economic Analysis (BEA) recently released Regional Price Parities (RPPs), a dataset that allows economists to directly compare the cost of living at the state level.

One of those economists, Michael Pakko at the University of Arkansas at Little Rock’s Institute for Economic Advancement, writes on his Arkansas Economist blog that by adjusting incomes in states and regions for differences in cost of living, RPPs can be used to calculate measures of purchasing power that provide real “price-adjusted” measures of income.

“Arkansas is a relatively low income state, but it is also a state with a very low cost of living. A dollar of income supports more real spending in Arkansas than it would in other, more expensive parts of the country,” said Pakko, chief economist at the Little Rock university.

According to the BEA, RPPs measure the difference in the price levels of goods and services across states and metropolitan areas for a given year. RPPs are expressed as a percentage of the overall national price level for each year, so RPPs higher than 100 represent state prices higher than the national average and vice versa.

For example, the New York City metropolitan area had a 2015 RPP of 121.9, which means that the Big Apple is about 21.9% more expensive than the national average. Meanwhile, Cincinnati, Ohio and the greater St. Louis area have two of the lowest RPPs among the nation’s largest metro areas at 89.2 and 90.6, respectively, indicating that goods and services cost about 10% less than the U.S. average.

Nationally, states with the highest “all items” RPPs were Hawaii (118.8), New York (115.3), New Jersey (113.4), and California (113.4). The District of Columbia’s RPP was 117.0. States with the lowest “all items” RPPs were Mississippi (86.2), Alabama (86.8), and Arkansas (87.4). Not surprisingly, Hawaii had the highest “rents” RPP at 163.4 and Alabama the lowest at 62.8.

And while the cost of living is lower across all areas of Arkansas, Pakko notes there are differences among the RPPs for regions within Arkansas. For instance, the cost of living is highest in the Northwest and Central Arkansas metropolitan areas. Non-metropolitan areas of the state have a RPP of 83.9, implying a cost of living that is 16% below the U.S. average.

Among the state’s metropolitan statistical areas (MSAs), Jonesboro is the least expensive place to live in the state and ranks among the 7th lowest cost of living among all 382 of the largest U.S. urban areas. To view Pakko’s analysis on RPPs for Arkansas’ metropolitan areas, click here.

PURCHASING POWER
Taking a deeper dive into the Department of Commerce’s data, including adjusting incomes in states and regions for differences in cost of living, Pakko notes that RPPs can be used to calculate measures of purchasing power that provide real “price-adjusted” measures of income.

In analyzing the latest data, the UALR economist points out that the RPP for Arkansas rose from 87.1 in 2014 to 87.4 in 2015. Because the RPP for the entire U.S. is 100, by definition, “this means that prices in Arkansas rose by 0.3 percentage points more than for the nation as a whole,” according to Pakko’s research.

And by taking into account the growth rates of total personal income and real personal income in Arkansas, adjusted for differences in inflation and regional prices, Pakko’s analysis also shows that incomes statewide rose 2.2% in 2015, with 1.4% attributable to real income growth and 0.7% to overall price increases.

Overall, the highest real income growth rate in the state was in the Fayetteville metro area, with 3.7% nominal income growth and 0% inflation. Nominal income in Pine Bluff increased only 0.1% in 2015, but prices declined by 0.5%, resulting in an increase in real income of 0.6%.

In dollar terms, per capita income in Arkansas was $38,257 in 2015, which amounted to just under 80% of the national average.

“When we take into account the higher purchasing power of incomes in Arkansas, real per capita income is over 91% of the national average,” Pakko writes on his blog.

According to the state, the highest per capita income in the state is in the Northwest Arkansas metro area. In dollar terms, per capita income is 9% above the national average. After taking into account the fact that the cost of living is over 10% below the national average, per capita income in the Fayetteville metro area is 22% above the national average–in terms of purchasing power and standards of living.

The very low cost of living in Jonesboro has a particularly large impact on this real income comparison. In dollar terms, per capita income in Jonesboro is only 70% of the U.S. average, but after adjusting for prices it amounts to 86%.

Meanwhile, a similar new study by financial technology firm SmartAsset that aims to find communities in each state that are most affordable shows that residents of Benton, Saline and Lonoke counties get the most out of their spending dollars compared to workers in Arkansas’ other 72 counties.

SmartAsset’s new report, calculated partly from Department of Commerce income and Bureau of Labor Statistics’ consumer spending data, compares median income and cost of living data nationwide to find the counties where people hold the most purchasing power. The “purchasing power index” in Benton County is 68.55, based on annual median income of $56,239 and a costing of living tally of $37,149.

The full study results, methodology, and interactive map can be found here.