2010 Exchange Rate Fluctuations & Cost of Living

Since the beginning of the year, exchange rates have been fluctuating a lot and have consequently impacted cost of living indices.

For the purpose of this article, we have compared exchange rates from end of December 2009 and end of June 2010.
Between those two dates, most currencies have strongly revaluated against the euro, with increases by 10, 20 or even 30% for some currencies.
Among others, the US dollar has appreciated by 17.5% in only six months.

For example, to calculate the allowance of a Belgian expat assigned to New York, we now use a COL index 17% higher than at the beginning of the year. The latest similar exchange rate dates back to the first semester 2006.

A strong impact on indices

Exchange rate fluctuations combined with inflation have therefore generated strong variations in cost of living indices.
When an expat is assigned to a location where inflation rate is higher than in the home location, the index increase will be strengthened.

Let’s consider the cost of living evolution between Paris and Kiev: the COL index has increased by more than 25% in six months. The increase is due both to the hryvna revaluation (±18%) and to inflation which is higher than in France over the same period.
In such situations, without a COL allowance update, expats see their purchasing power erode accordingly.

Increases in both Asia and Europe

Strong revaluations against the euro have been reported worldwide.

The Chinese yuan has gained 18% and consequently, all Chinese cities have risen up the ranking of the most expensive cities in the world.
The Indian rupee (+18.3%) and the Japanese yen (+22.2%) have had similar substantial effects.

Currency fluctuations also concern European countries. With a revaluation by 12.2% since the beginning of the year, the Swiss franc has never been so strong against the euro.
The pound sterling (+11.5%) and the Russian ruble (+14.1%) have also reinforced over the same period.

Latin America : currency fluctuations and inflation

The strongest fluctuations have been registered in Colombia, Haïti and Costa Rica, where local currencies have gained 25-30% against the euro.
In those countries, inflation is usually higher than in Europe and this factor amplifies COL index increases.

A few decreases

Some currencies have however devaluated against the euro during the first semester 2010.
The decreases are moderate and concern countries like Serbia, Hungary and Rumania in Europe, or Guinea in Africa.

The key: regular updates

Strong fluctuations in cost of living indices will prevail as long as the foreign exchange market has not stabilised.
More than ever, cost of living evolution is worth monitoring and a more frequent update of COL allowances might be the solution.

It can avoid expat’s complaints about their decreasing purchasing power when a COL index increases and it can avoid overpay when a COL index decreases.

Calculating COL indices for expat packages is our core business: EuroCost International can provide a customised solution that meets your needs.

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