Using an index to calculate cost of living is a great way to measure an individual’s expenses that get accrued on a daily level, such as food, housing, and clothing. With an index, they can also monitor the amount an expense increases over time.
Officially, no index for cost of living is recognized by the federal government. However, a few businesses provide them to cove certain areas of the county.
What Makes Up an Index for Cost of Living
Prices fluctuate when it comes to the type of goods and the areas where the goods can be obtained. Having a high salary in a rural area may allow the person to live good due to the fact that things would not be considered as expensive as compared to New York or LA.
When it comes to the cost of living, the type of work a person decides to do can also be influenced as well as the adequate salary and location for living. Being able to save can also be influenced by the cost of living because if the cost of living is high, then the individual will be spending more than can be saved.
With expenses that ae based on need, they can become higher cost wise and can take a huge part of earnings. By using an index to calculate cost of living, an individual will see the amount of increase. Plus, the index could show how much an expense can fluctuate from one section of the country to the next.
Individuals can decide, based on the index whether their salary is enough to survive and cover basic every day expenses. Once decided, an assessment can be made regarding any money left over.
The Functions of an Index
With many indexes available that use many determinants, a lot of them have one commonality, which is the base. The base of the cost of living is depicted with 100. The cost of living base is often depicted as a certain region o even as many areas combined. Areas near the base then get measured and have a number assigned to them to signify the cost of living.
You also need to keep in mind what the income in the area is on average. This means a lower cost of living region may also have a lower average income than other parts.
Types of Indexes Commonly Seen Today
Like it was mentioned before, many different indexes ae used by several businesses in ode to figure out what an areas cost of living is. We’ve listed the 3 most common below.
The Economic Policy Institute Index
The index provided by the Economic Policy Institute offers data that is updated regularly for many U.S regions and cities. It also integrates a calculator to calculate specific areas differences in the cost of living. It also includes expenses like healthcare, housing, food, transportation costs, and childcare services.
A good example is when calculating an expensive city such as NY with a family of four. The family’s cost of living was above $145,000, but an income of mid-level was only slightly above $100,000. Even though a yearly salary of $100,000 is nice, it still would not allow you to survive the city’s high cost of living.
The ACCRA Cost of Living
ACCRA’s index for calculating cost of living is intended for the measurement of spending among consume items that involve food and groceries, housing, healthcare, transportation, and utilities.
The index is published every 3 months and information is gathered by the Council for Community and Economic Research. In 2019, the quarterly index had listed Harlingen, TX as having a low cost of living, while NY and San Francisco wee highest.
The Social Security Cost of Living Adjustment Index
With the SSA COLA, individuals can determine their costs of living as they enjoy retirement benefits. The COLA is adjusted accordingly and can fluctuate based on inflation, which is the pace that prices become high o low within an economy.
For instance, an annual income of 25,000 with a 3% inflation rate would not have enough power to purchase everything necessary to survive because of the high prices. A 3% rate may not seem like much, however it can add up quickly over the years and can appear as a significant amount of reduction after it is all said and done.
Due to this possible high rate of inflation, the SSA COLA’s purpose is to make benefits higher in order to stay above the rate of inflation, which a Consume Price Index determines. It is important to keep in mind that the Consumer Price Index is only indicative of an average price for goods that would normally increase in price. Some examples of prices calculated by CPI include food and drinks, clothing, education, housing, and transportation. You need to keep in mind that the CPI does not measure everything perfectly as it does not include items that have a high value.
CPI restrictions as an Index for Cost of Living
A CPI has restrictions when it comes to calculating cost of living because it is not a tool of measurement for a specific region.
In most cases an indicator estimates all changes that occur over the yeas that ae needed to ensure that a certain standard is met. The indicator also needs to be able to include changes in the way a consume makes purchases based on spending habits, adjustments, and any other conditions that happen within the economy like switching to a product that has similar functions but at a lower cost to use.
When a consumer shifts from one product to another it is known as substituting. When substituting happens it is due to a decrease in a standard of living being maintained that is below the calculated cost of living.