All About Cost of Living & How It’s Calculated
Cost of living is an unofficial measurement of how much money you have to spend to buy the goods and services you need depending on where you live. It varies from town to town, city to city, state to state and country to country, but one thing never changes. A place’s cost of living will determine whether or not you can afford to move there or even vacation there for any length of time. It will have the last say on if, when and where you can retire and how you’ll budget your money along the way. When the cost of living increases but your income does not, tough choices are on the horizon.
If you move from Philadelphia, Pennsylvania, to Philadelphia, Mississippi, you might find that you can save more money every month without downsizing your lifestyle. Migrate in the other direction, and you’ll quickly learn that your new city requires a whole lot of sacrifices and compromises just to get by on the same salary.
What Does It Cost To Live an Average Life?
Everyone knows that average people in New York City live in comically small apartments with exorbitant rents that could easily satisfy the mortgage for a roomy house somewhere cheaper. Housing is an important part of the cost of living, but that’s just one piece of a much larger puzzle. The cost of living includes all the things that the average person has to spend money on to maintain an average lifestyle in a certain place. That includes the cost of things like:
- Other necessities
- Energy and utilities
- Child care
- Entertainment and recreation
Those are broad categories that can all be dissected on a more granular level. Transportation, for example, might include the average cost of gas, public transit like buses and trains, car insurance and vehicle registration fees.
Indexes Compare Living Costs and Measure How They Change
Indexes show how the cost of living changes from one city, region, state or country to the next. They also reveal how the cost of living changes over time. To make one-to-one comparisons possible, indexes use a standard baseline, usually represented by the number 100, as a neutral point.
You’ll see the national average as the baseline in a lot of domestic cost-of-living indexes. International indexes often use New York City as the 100 standard. Either way, the end result is the same. A place that scores 115 is 15% more expensive than the baseline. The cost of living is 20% lower in a place that scores 80.
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There Is No Official Index, But the CPI Is the Barometer
The U.S. government does not publish an official cost-of-living index, but it does publish the Consumer Price Index. One of the most important and closely watched economic indicators, the CPI measures how the cost of specific goods and services changes over time. Economists use it to measure inflation, but since the CPI tracks location-specific price changes in all the things that average people have to buy on a regular basis, the CPI is also the source of cost-of-living data.
So, Where Do I Find the Cost of Living Index?
Several reputable agencies and organizations publish their own cost-of-living indexes based on the CPI and other data, including:
- The Economic Policy Institute: EPI provides up-to-date cost-of-living data for all counties and metro areas in the United States. Its Family Budget Calculator is a helpful tool that reveals community-specific costs for 10 different family types.
- ACCRA Cost of Living Index: This report is published quarterly by the American Chamber of Commerce Researchers Association and the Council for Community and Economic Research.
- The Social Security Administration’s COLA: The SSA makes changes to retiree benefits every year based on inflation, which shows how fast the cost of goods and services is rising. That makes the SSA’s annual Cost-of-Living Adjustment (COLA) an excellent indicator of changes in the national cost of living.
- EIU Global Liveability Index: The most prominent international cost-of-living index is the Economist Intelligence Unit’s annual Global Liveability Index, which wasn’t published in 2020 due to the pandemic.
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Last updated: May 3, 2021