With emerging markets dominating both ends of the rankings, Simon Baptist, regional director for Asia at the EIU, pointed to three key drivers of cost of living in these countries: the exchange rate, government policies and commodity prices.
“We’re expecting, over the course of this year, the rupee, the yen and the euro to all have a fairly good year,” he told CNBC. “That’s going to up the cost of living in those cities. On the other hand, currencies we think are going to struggle — including those in Brazil, South Africa, (South) Korea, Indonesia and China — those places we expect the cost of living is going to come down.”
With a lot of prices in emerging markets regulated by governments, policies such as taxes and social norms tend to have a bigger impact on prices, according to Baptist.
For example in India, inflation dropped sharply after the government decided to ban and replace large-denominated notes last November that saw a lot of planned spending get postponed owing to a cash crunch. As the effects of demonetization ebbs, Baptist expects overall inflation to pick up, but the government’s infrastructure spending could help keep food prices down.
“Something that could make a big difference in India actually is the improvement that seem not be happening in food chain management — so say better refrigeration, improvement in electricity supply and refrigerated transport mean food prices should, over the next few years, become a bit less sensitive to fluctuations in the weather,” he said, adding it could potentially reduce the level of food price spikes.
Baptist added low service sector wages make non-tradable goods in India really cheap compared to other places.
Commodity prices, the report pointed out, are expected to rebound from 2017 following consecutive years of decline — this includes oil prices that bottomed-out last year and is expected to climb.
The report notes higher commodity prices affect prices, particularly in markets where basic goods make up the bulk of shopping baskets. Moreover, in countries that rely on commodities, higher prices could potentially lead to austerity, economic controls and weak inflation, which could depress consumer sentiment and growth.
