Real Income Growth across Metropolitan Areas
A standard measure of regional economic performance is per capita income growth. Typically, analysts try to remove the effects of inflation on the raw data for income growth by converting nominal per capita income for an area into real or constant-dollar income. The Consumer Price Index (CPI) is often used to make such adjustments. The chart below shows the real per capita income growth rates for a number of metropolitan areas from 2000 to 2006. (Note that the Bureau of Economic Analysis releases an adjusted income growth series, but it uses the PCE price index to deflate the raw data. We use the CPI here because of some comparisons we make below. Using the CPI instead of the PCE doesn’t affect the rankings of cities with respect to their growth, although it does affect the magnitude of the real growth rates.)
In our adjusted series, real income growth was highest in San Diego, Miami-Fort Lauderdale, and Honolulu and lowest in Atlanta, Detroit-Ann Arbor-Flint, and Portland-Salem. With respect to Fourth District metropolitan areas, Cleveland-Akron experienced very modest growth of 1.1 percent over the period, ranking it sixth-lowest among the 26 metropolitan areas. Cincinnati had a growth rate of 2.7 percent, placing it in the middle of the distribution, and Pittsburgh’s growth rate was 7.6 percent, the highest in the Fourth District.
This standard approach to measuring real income growth assumes that the changes in price levels experienced in metropolitan areas are similar to the change in price levels at the national level. No adjustments are made for differences in inflation rates across metropolitan areas. But inflation rates are not necessarily identical in different regions. For the areas in the figure above, the Bureau of Labor Statistics (BLS) produces region-specific CPI’s, which provide estimates of how price levels have changed over time within a particular region. Comparing changes in regional price indexes across regions shows which region has experienced a more rapid change in prices—not which region has a higher price level or higher living costs. The distribution of metropolitan average CPI growth rates indicates considerable variation in inflation across regions. Metropolitan areas on the low end, like Milwaukee, Portland, and Atlanta, had average annual inflation rates of 2.1 to 2.3 percent, while metropolitan areas on the higher end, such as Miami, Los Angeles, and San Diego, had rates of 3.8 to 4.1 percent.
These differences in regional CPI growth rates affect the calculation of real per capita income growth, as well. The figure below shows real per capita income growth of different metropolitan areas calculated with both the national and regional price indexes. Comparing the two measures of real income growth across areas, we note that the series deflated by the regional CPI shows less overall variation across regions than the series that uses the national CPI. Real income growth rates using the national CPI range from −7.0 to 11.5 percent over the period from 2000 to 2006. Using the regional CPIs as deflators, the range falls to −4.2 to 9.9 percent.
Moreover, there are significant differences in real per capita income across cities, depending on which deflator is used. For example, when we use the national CPI to adjust for changes in prices over time, New York has a real income growth rate of 6.4 percent compared to Cleveland’s 1.1 percent for the 2000–2006 period. When we use the regional CPIs, Cleveland’s real income grows at 4.0 percent, while New York’s grows at 3.0 percent. A key difference between Cleveland and New York in changes in underlying prices is that New York experienced much higher growth in the housing component of its regional CPI than did Cleveland.
Comparing the relative rankings of Fourth District cities in income growth across the two series using the different CPIs, we see that Fourth District cities move up in the rankings when the regional CPI is used to adjust for growth in prices. With the regional CPI, Cleveland is near the center of the distribution in income growth, with Cincinnati and Pittsburgh well above the median metropolitan area. This move up the rankings for Cleveland and Cincinnati is particularly noticeable. These cities had modest nominal income growth compared to other cities but experienced below-average regional inflation, which resulted in relatively stronger real per capita income growth.