‘They pointed their guns at us and started shooting’

The Economist Intelligence Unit’s Worldwide Cost of Living (WCOL) index, which this year reports the prices of 138 goods and services in about 130 major cities as at September 2020, has risen by just 0.3 points on average over the past year.

The three most expensive cities in the world are Hong Kong, Zurich (Switzerland) and Paris (France). Zurich and Paris have overtaken Singapore and Osaka ( Japan), which have slipped down the rankings.

The ten most expensive cities in the world

Cities in the Americas, Africa and Eastern Europe have become less expensive since last year, while Western European cities have become costlier. This partly reflects a rise in European currencies against the US dollar.

Of the ten categories covered by this report, tobacco and recreation (including consumer electronics) have seen the biggest price increases since last year, while clothing prices have seen the steepest decline.

The 30th edition of the World Cost of Living Index shows how the Covid-19 pandemic has changed the cost of living in 133 cities around the world since the start of 2020. Of the ten categories covered by this report, tobacco and recreation (including consumer electronics) have seen the biggest price increases since last year, while clothing prices have seen the steepest decline.

This report will focus on how the cost of goods has changed—owing to currency volatility, supply chain problems, the impact of taxes and subsidies, and shifts in consumer preferences—and how global consumer goods companies can adapt to the situation.

Overall, the biggest price gains in US dollar terms have been in Tehran (Iran), whose overall WCOL index has risen by ten points amid US sanctions, which have impacted the supply of goods.

However, although Tehran may have climbed almost 30 places, from 106th place to 79th position, prices in the city remain far below those in the three most expensive cities in the world, Hong Kong, Zurich and Paris. Zurich and Paris have overtaken Singapore and Osaka, which have slipped down the WCOL rankings from joint-first last year (with Hong Kong) to numbers four and five.

Prices in Singapore fell as the pandemic led to an exodus of foreign workers. With the city state’s overall population contracting for the first time since 2003, demand has declined and deflation has set in.

Osaka has seen similar trends, with consumer prices stagnating and the Japanese government subsidising costs such as public transport. The biggest price drops have taken place in Rio de Janeiro and São Paolo (both in Brazil), reflecting weak currencies and rising poverty levels.

Local currency exchange-rate movement against the dollar caused many of the shifts in the WCOL rankings, given that cities are compared using an index in which New York City is the base city. In general, currency weakness has followed the pandemic as it spread across the world from Asia to Latin America. By September 2020, when our survey was taken, currencies were weakest in the Americas and strongest in Western Europe.

Supply-chain problems have also affected price trends in our 2020 survey, with shortages of goods such as toilet roll and pasta fuelling price increases in some categories. Tehran’s leap in the ranking is directly linked to US sanctions, which have stopped imports in several categories.

lIn certain cities, government actions have driven price changes. Some countries (such as in Argentina) have imposed new price controls amid high demand from panic buyers. Others have raised taxes to offset revenue shortfalls. For example, the oil price slump led the Saudi government to raise value-added tax (VAT) from 5% to 15% from July 2020.

Many countries have seen a sharp fall in disposable incomes, despite government support. Consumers have responded by increasing precautionary savings and slashing spending.

Changes in lifestyles caused by the pandemic have also influenced prices—for example, stay-at-home shoppers have new views on the goods and services that they see as essential.

Biggest movers down the ranking in the last 12 months

Biggest movers up the ranking in the last 12 months

The impact on consumer goods prices

The 2020 WCOL survey shows that, while most prices for consumer goods and services have remained fairly flat over the past year in the world’s major cities, the pandemic has impacted particular categories differently. With many shops closed during lockdowns, the prices of essential products have been more resilient than those of non-essential goods, while prices for products that appeal as impulse purchases.

to shoppers browsing retailers’ shelves have been hard-hit. What consumers see as essential has also shifted. Bottled water is not a surprise, but meal-preparation kits have replaced restaurant meals for many middle-class families.

Amid the pandemic, price-conscious consumers have also opted for cheaper products in many countries, increasing-price competition for less-expensive goods. Low demand has had a particular impact on clothing prices, for example.

On the other hand, high-earning consumers have been comparatively unaffected by the pandemic. While they are likely to shop less, prices of premium products have remained resilient. Supply-chain problems have also had differing impacts on different goods, pushing up the price of high-demand products such as computers in some cities.

Prices now and then for the 10 most expensive cities

Average price for a 1kg loaf of bread; US$

Prices for consumer staples were flat overall

While the prices of packaged goods, such as coffee, cheese, rice and orange juice, rose across most cities in the latest WCOL survey, the average index for the food and grocery category remained flat. However, the index for the shopping basket, which includes a variety of food items and non-alcoholic beverages, fell in 2020 for 50 of the cities surveyed.

Latin America and Africa accounted for most of the declines, mainly owing to weak local currencies and raised poverty levels. Caracas, Rio de Janeiro and Lusaka saw some of the steepest declines in the shopping basket index. One of the biggest increases was in Tehran, where US sanctions led to supply challenges. All eight Chinese cities saw increases.

Alcohol prices exhibited an upward trend, with prices of local beers holding up better than those for the top brands. While bars are shut in many cities, overall demand remains strong. Online sales are high in cities where they are allowed. In some countries, such as India, prices rose owing to increased taxes.

The mean index for tobacco reported the highest year-on-year increase for any non-durable goods. All five Australian cities saw double-digit increases in the tobacco index, while three US cities— Cleveland, Boston and Pittsburgh—were among those that saw steep falls.

Of the ten product categories covered by this report, clothing was the only one to see an average fall in the index, dropping by more than 1 point. Sales of clothing and footwear plummeted as non–essential stores were shut in most countries during lockdowns. Despite a shift to online retailing, many consumers delayed wardrobe changes. Fast-fashion brands and department stores were the most affected, and the resulting glut weighed on prices. We expect global consumer spending on clothing to fall by over 9% in 2020 and recovery to be slow over the next few years.

What to expect in 2021

Although much will depend on the course of the pandemic, we expect many of the above price trends to continue into 2021. With the global economy unlikely to return to pre-pandemic levels until 2022, spending will remain restricted and prices under downward pressure. Many price-conscious consumers will prioritise spending on staples, home entertainment and faster internet access. Big-ticket items, as well as clothing and out-of-home recreation, will continue to struggle.

Laptop and smartphone prices will also bear the brunt of tariff wars, as will many items in the food basket. Imported goods will remain susceptible to currency fluctuations. We expect online sales to continue to expand their share of total retail sales in 2021. However, even online retailers will struggle to find new sources of revenue and will rely on price competition to boost volumes.

Consumer companies looking to establish a pricing strategy must evaluate whether remote working will be a temporary or permanent trend in their markets, as this will determine how they package or sell products. Food sales will focus on family meals, rather than one-person lunches. Safer packaging will win out, as will price and convenience.

Above all, pricing and sales strategies will be driven by lockdown rules. Where only essential retail is permitted, competitive one-stop-shopping destinations, including online marketplaces (such as Tmall, Shopee and Amazon) and real-world superstores (such as Walmart, Costco and Carrefour), will do well.

Until recently, online retail has favoured international brands, but this advantage is now being eroded. direct-to-customer channels will give companies better control over pricing and inventory. Tying up with retailers with omnichannel presence will be key for packaged goods makers.