Life is expensive. The average person requires certain items and services to maintain a standard lifestyle. The Bureau of Labor Statistics breaks down necessary expenses into eight categories: apparel, education, housing, medical care, recreation, transport, and other goods.
The costs associated with each of these groups are included. Insurance, vehicle maintenance, toll fees, vehicle licensing and registration, bus or taxi fares, and any other transportation-related costs are included in the transportation group; the housing group includes insurance, maintenance, utilities, rent or mortgage payments, child care, phone bills, or any other cost associated with having a place to live.1
Understanding how the cost-of-living index is calculated and how you can compare them will help you decide how much you are able to stretch your paycheck.
How to Calculate Cost of Living
Cost of living is a measure, and your expenses may be higher or less depending on where in the world you live. Fuel costs, for example, would be higher in New York than in Mississippi.
The agencies calculate the cost-of-living by comparing prices of representative goods and services necessary to maintain an average lifestyle. The agencies then calculate how much the item would cost a person in a given year. A gallon of milk may not be as expensive as a dress but, over the course of a year food will cost more. The price of each item is then weighted according to its importance in a typical household’s budget.
The totals and averages of these expenditures are used to create indexes that can be used to compare different areas. These indexes are called Regional Price Parities by the Bureau of Economic Analysis. The RPPs are different for each state and the Metropolitan Statistical Areas (MSAs)–a large area with a high population density.
Consumer Price Index is a more comprehensive example of the official measure of inflation by the federal government. The U.S. The U.S. Department of Labor measures prices of about 80,000 products and services at 23,000 retail and service companies. The data is then weighted according to the location of where each item was purchased. The CPI does not include income taxes, but it includes sales taxes. 3
Note:
Different CPI Databases can be used. All Urban Consumers is usually the database that is most commonly used.
Cost of Living Index and Comparison
In general, measurement indices are used to make comparisons. Cost-of-living indices give you the percentage difference in cost between your current location and a different area. Your cost of living is your baseline.
It’s especially useful to compare international locations when traveling internationally because a comparison compensates for a data-component=”link” data-ordinal=”1″ data source=”inlineLink” and data type=”internalLink”. Comparing international locations is especially useful for travelers who are traveling internationally, as a comparison can compensate for differences in exchange rates.
Comparing the cost of living of your locality would be the benchmark. You may end up spending more money if you are in a place with a high cost of living.
Cost-of-Living Estimates
The cost of living tools and reports will tell you how much it costs to live in different categories such as food, housing and gas. Remember that these estimates are based on a survey sample, and your cost of living could be very different. The Consumer Price Index, for example compares cost of living in major U.S. cities or regions.
The U.S. The Department of State offers links to other resources that can help you decide where to live.
The Economist Intelligence Unit provides a Cost-of-Living Survey which compares cities across the globe. The relative costs of goods and services are taken into consideration. To help you compare, the EIU provides a Global Liveability Index.
Note:
The cost of living alone does not tell you much about how easy it is for you to live in a city. Pollution or crime are not always an immediate cost. These factors may simply make it harder to enjoy the city.
The Highest and Lowest Costs of Living in the World
The cost of living index is useful for many reasons. It can give you a perspective on your money and help you choose where to retire. It can also be used by policymakers to create or adjust policies and legislation concerning labor and commerce.
Mercer’s Cost of Living City Ranking 2021 provides information about the cost of living in different cities around the globe. The site lists the 10 most expensive cities around the globe. The first city listed is the most expensive:
- Ashgabat (Turkmenistan)
- Hong Kong, Hong Kong SAR
- Beirut, Lebanon
- Tokyo, Japan
- Zurich, Switzerland
- Shanghai
- Singapore
- Geneva, Switzerland
- Beijing, China
- Bern, Switzerland
The 10 most affordable cities are usually located in areas that are unsafe, poor, or war-torn. The first city listed is the lowest-cost one:
- Bishkek (Kyrgyzstan)
- Lusaka, Zambia
- Tbilisi, Georgia
- Tunisia
- Brasilia, Brazil
- Windhoek, Namibia
- Tashkent, Uzbekistan
- Gaborone, Botswana
- Karachi, Pakistan
- Banjul, Gambia4
Cost of Living Adjustment and Increases
The Cost-of-Living Adjustment (COLA), is the adjustment made to wages or benefits in order for them to keep up with the current cost of living. It is used by the government for federal retirees, and those receiving Social Security benefits. The Social Security Administration has announced that benefits will increase by 5.9% in 2022. This is a significant jump from the 1.3% benefit increases for 2021. 5
Cost of living is also used in government worker’s benefits, union negotiation, and contracts with valued employees. Employers in the private sector will also sometimes use cost of living to determine whether or not to ask employees to move to another location.
FAQs (Frequently Asked Questions)
What are the causes of differences in cost-of-living?
The average income and price levels in a region will affect the cost of living. Housing, food and gas cost more in areas where residents earn more money. The cost of living can also be affected by lifestyle and access to resources. Cost of living will be higher in an area where fuel is expensive and there is no public transportation than one with low or free public transport.
What state has the lowest cost-of-living?
Mississippi’s cost of living is 83.3% less than the U.S. national average. Hawaii is the state with the highest cost-of-living. It’s almost twice as expensive for residents to live in Hawaii than the U.S. average. 6
