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Exchange rate fluctuations:
a direct impact on cost of living indices

Published in September 2009
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Expats sometimes worry about soaring prices in their host location, but inflation is not the only factor that influences their purchasing power.

Exchange rate fluctuations indeed strongly impact on cost of living indices. During the past year, considerable fluctuations have been registered.

The US dollar has reached its lowest rate in the middle of 2008. US cities have therefore collapsed in the world‘s most expensive cities ranking.
Since then, the USD has revaluated. For example, in June 2009 (release date of our latest COL indices) the USD has gained ±12% in one year against the euro. But between March and August 2009, it has lost just over 8%.

The pound sterling has also fluctuated a lot. After loosing ±25% against the euro during 2008, it has somewhat reinforced by 10% since the beginning of the year. British cities have therefore climbed the ranking accordingly.
The pound however remains much weaker than 2 years ago.

Another European currency that has also strongly devaluated against the euro is the Swedish crown. Consequently, Stockholm is no longer one of the most expensive European capitals.
The same is true for Hungary and Poland, although the forint and the zloty have somewhat revaluated since March, after several months devaluation. June 09 indices are therefore higher compared to March.

Eastern capitals have also experienced strong devaluations: the Russian rouble has lost 15% in one year and, worse still, the Ukrainian hryvnia has devaluated by 30% against the euro between June 2008 and June 2009.

It has to be highlighted that a devaluation of the host currency does not systematically generate a decrease in the cost of living index.
For example in Ghana, a strong inflation has compensated for the devaluation: the cedi of Ghana has depreciated by 20% in one year, but the index for its capital Accra decreases much less.

Not all currencies have devaluated against the euro: the Japanese yen for example has gained ±20%. As a consequence, Tokyo is now again the most expensive city in the world.

As a conclusion, 2 major elements have to be pointed out.
Exchange rate fluctuations often reflect economic changes in a country and inevitably generate an impact on the inflation rate of this country.
And last but not least, a decreasing index because of the exchange rate does not at all mean a decrease in the purchasing power of an expatriate. But it will have an impact on the expatriation budget of his company !

Please feel free to contact us for further details on specific countries.