FAQ: Cost of Living Index

By Kristina Cowan

What is the Cost of Living Index? If you are trying to figure out what the Cost of Living Index is all about, look no further. Using a Cost of Living Index isn't rocket science, but there are important nuances you should know about and critical questions to ask.

1. What is the Federal Cost of Living Index?

There is no official Cost of Living Index provided by the U.S. government.

Steve Reed, an economist at the U.S. Bureau of Labor Statistics' Consumer Price Index (CPI) program, said the CPI "is the closest thing we've got to the cost-of-living" index.

The Consumer Price Index measures changes over time in what urban consumers pay for a basket of goods and services. According to the Bureau of Labor Statistics, the CPI is the most widely used measure of inflation.

Pamela Villarreal, a policy analyst at the National Center for Policy Analysis in Dallas, pointed to the ACCRA Cost of Living Index as another good source of information on the cost of living.

The ACCRA Cost of Living Index measures prices of goods and services among participating urban and suburban areas. The index "is designed to provide the best possible measure of relative differences among urban areas in the cost of consumer goods and services appropriate for professional and managerial households in the top income quintile," according to the Council for Community and Economic Research (C2ER), which publishes the index. (Full disclosure: The PayScale Cost of Living Calculator utilizes ACCRA data).

2. How does the Consumer Price Index compare to the ACCRA Cost of Living Index?

The CPI measures price differences in goods and services over time, while the ACCRA index gauges price differences in goods and services from place to place. In other words, the CPI provides a measure of inflation, while the ACCRA Cost of Living Index provides cost comparisons between different cities based on a given moment in time.

"If someone asks what the overall price of groceries over time is, we couldn't answer that," explained Erol Yildirim, COLI project manager at the Council for Community and Economic Research. "If I'm spending $13,000 in city A, how much does that translate for city B? That's the question we're trying to answer."

3. How do you find the Cost of Living Index for a city?

The ACCRA index is a good bet when you're looking for a Cost of Living Index for a particular urban area.

"If I take a job in another area and they give me a higher salary, what will that salary buy me in terms of goods and services? That's what people really want to know, and that's where the ACCRA index comes in. It's a very good measure of changes at one point in time comparing different areas," Villarreal said.

The ACCRA Cost of Living Index is geared to a certain demographic. An online manual for the index says: "The question the ACCRA Cost of Living Index is designed to answer is: How do urban areas compare in the cost of maintaining a standard of living appropriate for moderately affluent professional and managerial households? The first thing to note about this question is that it's not at all the same as comparing average standards of living. The Index is designed to compare the costs of a particular standard of living in all areas-and it doesn't matter whether that standard of living is typical of the overall population of your area."

4. How do you find the Cost of Living Index for a small town?

Because the ACCRA Cost of Living Index is aimed at urban areas, data is collected from metropolitan areas that meet certain population requirements.

All communities were originally eligible to participate in the ACCRA Cost of Living Index regardless of size. As of June 1999, however, limitations were put in place to ensure an accurate representation of “an urban professional or managerial standard of living,” as explained on the index website.

With the exception of areas already included in the Cost of Living Index prior to 1999, cities must have a population greater than 50,000 in order to participate.

Similarly, the BLS website states that the Consumer Price Index “is designed to measure the experience with price change of the U.S. urban population and thus may not accurately reflect the experience of people living in rural areas.”

5. How do you find the Cost of Living Index for a state?

Experts say they don't know of a Cost of Living Index for individual states. Even if one existed, it wouldn't be useful, they say.

Yildirim pointed to New York state as an example. Living in Manhattan is much more expensive than living in upstate New York, he said, so a Cost of Living Index for the entire state would be misleading.

6. What's the Consumer Price Index vs. a Cost of Living Index?

The BLS says though the CPI is often referred to as a Cost of Living Index, it's somewhat different from a complete Cost of Living Index:

"Both the CPI and a Cost of Living Index would reflect changes in the prices of goods and services, such as food and clothing that are directly purchased in the marketplace; but a complete Cost of Living Index would go beyond this to also take into account changes in other governmental or environmental factors that affect consumers' well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime that would constitute a complete Cost of Living framework," according to the BLS website.

7. What's the "average cost of living" vs. a Cost of Living Index?

Yildirim said the BLS's Consumer Expenditure Survey shows the consumption patterns of different groups, such as "Age of reference person," "Occupation of reference person," or "Quintiles of income before taxes," etc. The ACCRA Cost of Living Index only looks at the consumption patterns of professional households in the top-income quintile. This is not the same as average cost of living. To calculate the average cost of living, you have to change the weights of categories and goods and services based on the consumption patterns of "All Consumer Units."

The BLS says the Consumer Expenditure Survey "collects information from the Nation's households and families on their buying habits (expenditures), income, and household characteristics. The strength of the survey is that it allows data users to relate the expenditures and income of consumers to the characteristics of those consumers."

8. How do Cost of Living increases affect indexes like the CPI and ACCRA?

Reed of the BLS said, "CPI measures changes in the cost of living, so we hope that [Cost of Living increases] would cause the CPI to move." Likewise, Villarreal said, "When prices go up then the CPI index goes up. ... You're measuring inflation, which is an overall rise in prices."

The ACCRA Cost of Living Index is not useful for comparisons over time-the "meaning" of 100, the average for all participating places, changes from quarter to quarter, according to Yildirim.

How does a Cost of Living Index help with salary negotiation?

Whether you're starting a new job or negotiating a raise, researching cost of living data can help to ensure that you are earning a fair salary.

For example, imagine that you are relocating to New York City. You already have a job offer, but you want to find out how much you will need to earn in order to maintain your current standard of living. The salary for your position may be higher in New York, but how much will you be able to save given the city's high cost of housing?

This is where the cost of living index comes into play. Getting a cost of living comparison between cities will give you an idea of how much you need to earn in order to cover all of your expenses. And knowing your bottom line will give you confidence when it comes time to negotiate.

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