Estimates of State and Metropolitan Price Levels for Consumption Goods and Services in the United States, 2005

Price indexes are commonly used in time-to-time economic series to adjust for changes in price levels across years. This paper estimates price parities within the U.S., defined as an adjustment for differences in price levels across geographic areas at one point in time. The term parity is more frequently used in international comparisons, where purchasing power parities (PPPs) are divided by the exchange rate to denote differences in price levels across countries. The method described here for calculating regional PPPs is based on micro-level price data from the Consumer Price Index of the Bureau of Labor Statistics and on the American Community Survey of the Census Bureau. It uses a Bayesian spatial smoothing approach to obtain individual county price levels that are aggregated to regional price parities (RPPs) for 363 metropolitan areas and 51 states in the United States. An example of their relevance is given by comparing the Personal Income and Gross Domestic Product estimates produced by the Bureau of Economic Analysis for the year 2005 at national prices and at regional price parities.