What Is a Cost of Living Index?

What Is a Cost of Living Index?

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 for these categories rise over time and in different regions. It can demonstrate how need-based expenses vary from one area to another.

The costs of consumer goods and services vary between urban and suburban residential areas. A person's salary might provide a high standard of living in a small city in the Midwest. But it might not do the same in a large city like New York, Los Angeles, or Boston. An amount of $100 may purchase more goods and services in Iowa than in Texas.

No official cost of living index is provided by the U.S. government, but a few organizations track the costs of living throughout the country.

Learn about the Social Security Administration's 2.5% cost of living benefit increase for 2025.

How a Cost of Living Index Works

Most indexes set a base cost of living, often represented by 100. The base can be the cost of living in one region or the average of multiple regions. For example, Chicago could be pegged as the base city, and other regions would be measured against the base and assigned a cost of living number accordingly.

If it is 20% more expensive to live in Boston than in the base city, Chicago, Boston's cost of living number is 120.

The average income for a geographic area is a factor in evaluating a region's cost of living. A small town in the rural south might have a lower cost of living than most towns on the east or west coasts. However, the southern town's median income might be below the cost of living for that area.

Examples of Cost of Living Indexes

Economic Policy Institute

The Economic Policy Institute provides families with updated cost of living data for various metro areas throughout the U.S. with a helpful Family Budget Calculator.

The calculator helps families measure the differences in the cost of living for geographic locations and figures the costs of food, housing, child care, transportation, health care, other necessities, and taxes.

Based on 2023 data, the calculator found that the San Francisco metro area was the most expensive area for parents with two children.

The cost of living was estimated at $181,277 per year, while the median income for San Francisco was approximately $169,883 per year. Although a salary of $169,883 is highly attractive, it doesn't cover the costs to live in San Francisco.

COLI

The Cost of Living Index or COLI (formerly called the 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 second quarter of 2024, the COLI shows that Manhattan, New York had the highest cost of living, followed by Honolulu, Hawaii. Ponka City, Oklahoma had the lowest.

Social Security Administration's COLA

While not a cost of living index, the Social Security Administration's cost of living adjustment (COLA) reflects the broad increase in costs represented by the rate of inflation, which is the pace of rising prices as measured by the Consumer Price Index (CPI).

The COLA is announced each year and increases the Social Security benefits paid to retirees. For 2025, benefits will increase by 2.5%.

If a retiree earns $20,000 per year in benefits and inflation rises by 3% per year, the purchasing power of the income will decrease over time. The COLA increases can help combat the effect of inflation.

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.

^{Source: The Social Security Administration}

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.

The Bottom Line

Cost of living indexes measure the costs of food, shelter, transportation, energy, clothing, healthcare, and childcare and compare the expenses of one geographic region to another.

The Economic Policy Institute and the Council for Community and Economic Research provide indexes for areas within the U.S. A cost of living adjustment, COLA, is issued by the Social Security Administration annually and reflects the inflation rate.