Note: This information is compiled by expatriates who have, for various reasons, looked into these matters, not professional advisors. Please read our disclaimer.
Now, for an economist or someone at odds with their employer the following may be a bit short around the bend and if you really need to know about the distinctions between 'cost of living index', 'consumer price index', purchasing power parity' etc. we recommend you seek professional advice. The following is simplified talk.
One of the items which generally make-up the expat pay package is the 'Cost of Living index'. The cost of living index is, very roughly, determined by comparing a 'shopping basket' of products and services (sometimes including tax) in the home country with an equivalent basket in the country of placement and this basket is compared on a regular basis. The cost-of-living index is meant to give the expat a similar 'purchasing power' as he would have had at home.
These indices are determined by a number of companies in the financial and human resource sector and most multinationals sending out staff will use one of these. If you check the net you will find a number of references and tables but be careful with those, they often do not state the background of the figures or even the date for which they were valid, reliable data has to be 'bought'. If you want a first indication you could use the UN data referenced next here. This data uses New York as a base but the figures can be used relative to each other.
The index is generally adjusted every x months. Price changes, relative inflation and exchange rates will influence the index i.e. (generalised) if the inflation in the country of origin is lower than in the country of placement the index will be influenced upward. If the value if the currency in the country of origin increases the index will be influenced downward. There is much more factors involved but these are the basics.
What to look out for
You should be able to trust your companies' index if they use a reputable source but you could check the following items:
- In large countries, such as the US, cost of living can differ greatly in different locations. Make sure the correct location is used and not, for instance, the country average.
- The index may include housing and transport (car) cost. If your company is providing the housing it may not always be logical that they be included.
- If the index is lower than 100, a negative index, there are some companies which consider you should receive the 'lower' pay based on this (which would still give you a comparable 'purchasing power). Take note however of any obligations you may have in your home country which may not specifically be taken into account and which will, offcourse, not be affected by the index. Take note too that your saving potential may be decreased, if you managed to save 10% of your income this would be decreased when related to home currency too.
- Finally, if you want to keep an eye on the 'movement' of the index after the initial establishment you can do so even if the 'shopping basket' used is unknown. The relative 'consumer price index' as published by the Statistics departments of countries (your country of origin and assignment) give a trend. The indices of different countries have similar groupings but are not the same and the basket includes more and different items than a specific 'expat package basket', it gives a relative trend nonetheless.
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