Economy

These are the world's most expensive, and cheapest, cities to live in according to the EIU

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Half of the world's ten most expensive cities to live in are in Asia, with Singapore and Hong Kong firmly defending their top two spots from a year ago, according to a new survey from the Economist Intelligence Unit (EIU).

The findings were released Tuesday in a report titled "Worldwide Cost of Living 2017," which ranked the world's major cities by comparing more than 400 individual prices across 160 products and services including food, drink, clothing, household supplies and personal care items among others.

The Japanese cities of Tokyo and Osaka re-entered the top 10 rank, climbing seven and nine places respectively over the year to rank 4th and 5th, owing to a sustained recovery in the yen. The rest of the top ten comprised four cities in Western Europe and New York as the lone North American representative thanks to a relatively weak greenback last year.

Some of the cheapest cities to live in were also in Asia — particularly in South Asia — but the report noted many of these places had "well-documented economic, political, security and infrastructural challenges."

The biggest movers up the ranking in the last 12 months were mostly from the emerging markets — Sao Paulo and Rio de Janeiro climbed up 29 and 27 places respectively to rank 78th and 86th thanks to a recovery in the local currency and double-digit inflation. As well, Antipodean cities such as Brisbane, Adelaide, and Auckland clocked in higher.

Conversely Manchester and London dropped 25 and 18 places respectively mostly due to last year's plunge in the British pound following the Brexit vote.

Exchange rates a key driver of cost

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.

Global uncertainties and rising protectionism

Globally, the report notes, this year could see fallout from various political and economic shocks take deeper effect.

In the UK, the British government recently set the date to begin Brexit negotiations with the European Union. Following last year's referendum vote, the British pound tumbled sharply and Baptist expects the pound to decline further and remain volatile throughout the negotiations.

"There'll be moments of 'this seems like a good deal' and there'll be moments of 'this looks like a bad deal.' So I think the pound is going to be quite volatile so that's going to have an impact on the cost of tradable goods in the UK," he said.

Baptist added following the exit, EU goods will become more expensive in the UK and it will take time for the British government to sign trade agreements for cheaper supplies from elsewhere.

Trade will become less of a deflationary force in the global economy owing to rising protectionism, according to Baptist. Upheavals in trade agreements and international relations might push up prices for imports and exports, the report further noted.

Singapore is the world's most expensive city
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Singapore is the world's most expensive city

The Trump administration, for example, has put emphasis on having "fairer" trade deals with other countries and has vowed to renegotiate existing trade agreements.

But on the flip side, governments may have a tougher time to convince its citizens to pay higher prices for the same goods and services under renegotiated trade agreements, according to Baptist.

"People are now so used to having cheap goods from elsewhere that it's difficult to see that politicians will actually reduce access to goods that are already there, with some exceptions like say Brexit."

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