Forbes: The most expensive cities in the world

(An interesting article about cost of living, economy)

By Sarah Lynch
Forbes.com Jul 8th, 2009

Think your morning commute is expensive? Think again. The ride on a bus or subway in Tokyo costs $3.25. Grab a newspaper and a cup of coffee on the way and the total comes to $11.70. That's more than anywhere else in the world--24% more than what those same things cost in New York even.

Tokyo is the world's most expensive city, according to Mercer's 2009 Worldwide Cost of Living survey released today, with the cost of living up 13.1% from 2008; the city ranked at No. 2 in 2008's survey. Japan's capital is followed by Osaka and Moscow, which held the top spot in last year's rankings. Geneva comes in fourth.

The significant changes from last year are due to massive swings in exchange rates, with many currencies at their weakest in years against the U.S. dollar, during the March 2009 survey period. Because of this, New York moved up 14 spaces to No. 8 from No. 22. London dropped to No. 16 from No. 3 as the pound dropped as low as 1.37 against the U.S. dollar during the study period. Six months earlier, one pound was worth $1.86.

"Changes in exchange rate tend to be one of the major drivers, I would argue the major driver, in cost of living," says Rebecca Powers, a principal consultant at Mercer. Even with the U.S. dollar weakening over the past four months--it's now worth $1.65--due in part to the Obama administration's stimulus package, the cost of living in London, when measured against the value of the U.S. dollar, is significantly lower than it was a year ago, when the pound was worth more than $2.

Other notable jumps from last year's ranking to this year's are Dubai, which moved to No. 20 from No. 52, and Caracas, which moved to No. 15 from No. 89. Both climbed so quickly because the local currencies are pegged to the greenback; the more the dollar's value increased, so did the cost of living in those places (but Caracas also has a high rate of inflation, pushing up prices for basic goods).

All U.S. cities included in the ranking also experienced a rise, including Los Angeles, up 32 places, and Washington, D.C., up 41 places.

Behind the Numbers

To generate its ranking of the world's most expensive cities, Mercer, an international consulting firm, looked at more than 200 cities across six continents, examining the cost of over 200 items in each location, including housing, food, clothing, transport, household goods and entertainment to calculate an overall cost of living. The survey is used to help multinational companies determine compensation packages for employees living abroad. Mercer uses New York as the base city for the index and scores the cost of living there at 100 points. Cities scoring higher are more expensive; lower than 100, and they're cheaper. All cities included in the ranking are in comparison to New York, and currency is measured against the U.S. dollar.

"Since we're polling those places in a local environment, we're getting costs in a local currency," Powers says. "When the currencies fluctuate, that has a significant affect on costs." Powers says these cost fluctuations are making multinational companies reassess the need for expansion abroad.

"Companies have been much more guarded about their investments," she says. "While you can still argue that there is interest in emerging markets, the general pattern of money flowing into the same markets was interrupted when companies started looking at their money."

Johannesburg, South Africa (No. 143) bottoms out the complete list of cities with a score of 49.6. Also at the tail end are Monterrey, Mexico (No. 142), and Asuncion, Paraguay (No. 141).

Tokyo Steady, Shaky Everywhere Else

The main constant in these rankings, since Mercer's first set was released in 1994, is Tokyo's place at or close to the top. Osaka has only fallen outside the top 10, once, when it slipped to the No. 11 spot last year. While the value of the yen is strong against the dollar, Japan--and Tokyo in particular--has always featured prominently due to the high cost of international goods, says Mercer senior researcher Nathalie Constantin-Metral. One can count on Japan being expensive in good times and bad alike for the yen.

But there's no telling what will happen in a place like Moscow--which zoomed up to the top spot last year, and fell out of it this year. It will all depend, says Constantin-Metral, on the performance of Russia's currency. The ruble had been on a long, steady climb against the greenback as of March 2008; but it bottomed out at the beginning of March 2009. It's been on a recovery trajectory ever since, but still has a long way to go. Either way, the rankings make clear that the more the ruble slips, the less expensive a city Moscow becomes.

American cities, then, have more in common with a place like Moscow than anywhere in Japan. The more the dollar--and prices--move, the more or less expensive U.S. cities get, which means it's all up in the air as to what will happen over the year ahead. Tokyo and Osaka may be expensive, but at least everyone knows it for certain. Just about everywhere else, it seems, nobody knows for sure what the cost of living is like until the year is already in the rear-view mirror.

World's Top Five Most Expensive Cities To Live

1. Tokyo, Japan

2. Osaka, Japan

3. Moscow, Russia

4. Geneva, Switzerland

5. Hong Kong