Inflation, the Consumer Price Index and Relocating Employees
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Inflation, the Consumer Price Index and Relocating Employees

By Denise Oemig February 28, 2022

Categories: Anywhere Workforce Location Services

Rising prices, are leading many relocating employees to question the cost-of-living in their new cities. It is important to acknowledge inflation and increasing home prices in many markets. However, it is just as crucial to understand that when prices are increasing everywhere, there is little to no impact on the difference between locations when relocating. How so? Let’s dive in.

Consumer Price Index

The Consumer Price Index (CPI), an index that measures the change/variance in consumer goods and services released by the Bureau of Labor & Statistics, increased in 2021 by its highest amount in four decades. Early 2022 numbers show this trend is continuing at 6+%. The CPI covers a range of items from food and clothing to electricity and medical costs. It impacts everyone in the country, whether you’re relocating or not.

This index is used as the basis for many other calculations, including social security increases. This year, more than 70 million social security recipients each received a 5.9% cost-of-living adjustment, the highest since 1982. Many critics have said that the Social Security increase, calculated based on October data, is lagging. They believe it is low and expect similar increases next year.

Consumer Price Index Impacting Relocating Employees

How does the increased Consumer Price Index impact the cost-of-living for a relocating employee? The key is to remember that if prices are increasing at the grocery store and elsewhere—by 6% in Detroit and 6% in Los Angeles—the net difference or impact is little to nothing on the cost-of-living differential.

Inflation is not just impacting the relocating employee but every other company employee. Further, this means that all employees should be receiving annual increases in line with inflation, at an average of at least 6%. With employees leaving their jobs voluntarily at record numbers, the Great Resignation is expected to continue in 2022 which should lead many companies, looking to retain talent, to provide even higher annual increases.

Related Relocating Factors

Many relocating employees express concern about a related factor: increased home costs.  The S&P Case-Shiller Index—which measures the change in home market values in the 20 largest metropolitan markets in the U.S.—showed increases of 15-20% for almost the entire second half of last year. While certain markets are appreciating faster than others, almost all are experiencing increases.

Relocating homeowners should expect to pay more for a home in their new location than they may have prior. They should also expect to receive more when they sell their existing home. Some markets are experiencing limited inventory and bidding wars. While this makes it more difficult to buy a home, it doesn’t directly impact the cost-of-living. Cost-of-living only uses closed home market values (not listing prices as someone can list their home at any price).

An Important Note on Purchase Prices

It is lastly important to realize that when calculating an annual cost-of-living differential, the purchase price is amortized over a 30-year mortgage. Transferees aren’t paying the entire amount in the first year that they relocate. Other costs, ranging from taxes and transportation to goods and services are paid each year. Consider a scenario where average home market values have increased by $100,000 in the new location, while remaining completely flat in the old location (which is unlikely). With a 20% down payment amortized over 30 years, when combined with all of the other annual expenses, the overall cost-of-living differential will only increase by 1-2%.

The Impact of Inflation

Costs are increasing on just about everything. This is impacting relocating employees. However, it’s not just relocating employees. It’s impacting everyone. Cost-of-living calculations used for relocation—and paid to employees moving to higher cost locations—measure the difference between locations while national inflation issues should be addressed by an organization’s compensation strategy.

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