# How Is a Cost of Living Index Calculated?

Cost of living data includes the expenses incurred for food, shelter, transportation, energy, clothing, education, healthcare, childcare, and entertainment. A cost of living index tracks how much basic expenses rise over time and among different regions.

An official cost of living index is not created or reported by the U.S. government, but a few organizations track the costs of living throughout the country.

### Key Takeaways

• Cost of living indexes compare the expenses from one town or geographic region to another.
• A cost of living index includes food, shelter, transportation, energy, clothing, healthcare, and childcare.
• A cost of living index can track how much basic expenses rise over time.
• The Economic Policy Institute and the Council for Community and Economic Research calculate cost of living indexes.
• The Social Security Administration issues an annual cost of living adjustment or COLA based on the inflation rate.

## Understanding a Cost of Living Index

### ACCRA COLI

The ACCRA Cost of Living Index or ACCRA COLI is designed to compare the living expenses for various regions of the country. The index measures consumer spending on housing, utilities, groceries, health care, and transportation.

The quarterly publication is compiled and produced by the Council for Community and Economic Research. For the third quarter of 2022, the report showed that Manhattan, New York had the highest cost of living, followed by Honolulu, HI. Harlingen, TX had the lowest.

A Cost of living adjustment (COLA) is made each year for retirees receiving Social Security benefits. The adjustment is based on the inflation rate, which represents the pace of rising prices.

Based on the COLA, the Social Security benefits increased by 8.7% in 2023.

If a retiree earns \$20,000 per year in benefits and inflation rises by 3% per year, the purchasing power of the income is decreased. Over a five-to-ten-year period, the percentages can add up to a substantial reduction in income in real terms by factoring in inflation.

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The COLA is designed to increase the benefits paid each year to keep pace with inflation as measured by the Consumer Price Index (CPI). The CPI is the average price of a basket of basic goods and services that are selected to measure rising prices in an economy. CPI includes prices for housing, apparel, transportation, education, food, and beverages. Below is a table from the Social Security Administration detailing the cost of living adjustments each year since 1975.

## CPI vs. Cost of Living Index

There are limitations to using CPI as an index since it does not measure the actual costs of living in a given area or region. A typical cost of living indicator shows changes in costs over time that are required to maintain a specific standard of living.

A cost of living indicator factors in changes in consumer buying that stem from economic conditions, adjustments in spending, and habits that people make, such as using alternative products when a product becomes prohibitively expensive. The process of shifting expenditures is commonly referred to as substitution.

## Is the Consumer Price Index Considered a Cost of Living Index?

The CPI is the average price of a selected basket of goods and services that measures rising prices in an economy but is not a cost of living index. The CPI does not measure the costs of living in a given area or region.

## What Does it Mean When the Cost of Living Index Is Below 100?

Cost of living indexes have a baseline of 100, with figures above or below representing a city as more expensive or less expensive.  An index below 100 means the region or area is less expensive to live in than the national average.

## What Causes Differences in Cost of Living?

The cost of living is affected by the average income and prices in an area. When residents earn more, their housing, food, and gas will cost more in the region. The cost of living is also affected by access to resources and the lifestyle of the residents.

## The Bottom Line

Cost of living indexes compare the expenses of one geographic region to another and measures the cost of food, shelter, transportation, energy, clothing, healthcare, and childcare. The Economic Policy Institute and the Council for Community and Economic Research provide indexes relative to the United States. A cost of living adjustment, COLA, is issued by the Social Security Administration annually and reflects the inflation rate.

Article Sources
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1. Economic Policy Institute. "EPI updates Family Budget Calculator with data on the cost of living in every county and major metropolitan area."

2. Economic Policy Institute. "Family Budget Calculator."

3. United States Census Bureau. "San Francisco County, California."

4. Economic Policy Institute. "Family Budget Calculator."

5. The Council for Community and Economic Research. "ACCRA Cost of Living Index Methodology."

6. The Council for Community and Economic Research. "Quarter 3, 2022 Cost of Living Index Release."

9. U.S Bureau of Labor Statistics. "Consumer Price Index."