This week, the U.S. Bureau of Economic Analysis released new figures for real (inflation-adjusted) income and consumer spending by state for 2023. The data show how changes in prices over time and across geographic areas affect relative income and purchasing power.
At the heart of the real income and consumption data is the calculation of Regional Price Parities, which compare the cost of living across states. In 2023, for the second year in a row, the state with the lowest cost of living in the nation was Arkansas, with a RPP of 86.5. This figure implies that the overall cost of living in Arkansas is 13.5% lower than the U.S. average.
Arkansas moved from being a low cost-of-living state to the lowest cost-of-living state in 2022, with a decline in the state’s RPP coefficient that continued into 2023. This means that the relative cost of living in Arkansas was declining relative to the U.S., or more concretely, that consumer prices were rising more slowly in Arkansas than the rest of the nation.
As a matter of fact, we can use the RPP figures to derive distinctive patterns of inflation for the state compared to the nation. As shown in the figure below, Arkansas prices were rising faster than the U.S. average during the consumer-spending boom of 2020 and 2021, but the rate of price increase has been lower than the U.S. since then—particularly during the peak inflation year of 2022. From 2019 through 2023, the cumulative increase in Arkansas prices has been 14.8%, compared to 16.4% nationwide.
The differences in purchasing power that are identified in the RPP data also have implications for assessing the relative welfare of households. Without price adjustment, per capita income in Arkansas is only 82.6% of the national average and spending per capita is only 78.7% of the national average. After accounting for the relatively low cost of living, however, real incomes in Arkansas amount to 95.5 of the national average, while consumer spending is 91%. The price-adjusted standard of living in Arkansas is clearly higher than the nominal (dollar denominated) figures suggest.
