What is the Cost of Living Index?

Published by Thomas Herold in Economics, Laws & Regulations

'Cost of Living Index' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The Cost of Living Index refers to a price index that was created so that businesses and individuals are able to compare and contrast the cost of living relative to other cities, regions, countries, and times. This theoretical index takes the measure of variations in the costs of different key goods and services. It also permits substitutions with other similar goods when prices fluctuate.

One thing that is interesting regarding this Cost of Living Index is that there is not only a single methodology and index that reveals the national (or international) cost of living. One of the most widely used systems for these indices is known as the Konüs Index. These formats utilize an expenditure function like those employed in considering anticipated compensating variation.

In the United States, the most widely recognized and cited version of the Cost of Living Index was developed and is continuously maintained by the C2ER Council for Community and Economic Research. It first appeared in 1968. This version has proven to be the most consistent index for sourcing city to city cost-based comparisons in the United States. Their COLI data is widely recognized by such American governmental organizations as the U.S. Bureau of Labor Statistics and the U.S. Census Bureau. Similarly the President’s Council of Economic Advisors utilizes it routinely. Private national media outlets including CNN Money, U.S. News and World Report, Forbes, Kiplinger’s, ABC News, and countless others reference this index for the cost of living purposes. This makes it the closest possible thing to a nationally recognized and utilized COLI.

The reason for the C2ER COLI success centers on their entirely transparent methodology for creating and their locally sourcing of data. Users of the index know precisely how they compile it. They have an Advisory Board made up of government officials and academic researchers which reviews their methodology and data continuously. This helps to explain why this COLI finds reference use within the Census Bureau Statistical Abstract of the United States. As the C2ER publishes it quarterly and collects data on local levels from more than 300 different independent researchers, this represents the only locally-based and –sourced Cost of Living Index compiled on the United States.

The firm employs more than 60 goods and services within the index’s underlying data. They precisely select these different representative goods and services in order to take into consideration the various consumer categories of spending. They assign weights for the various costs utilizing data from government surveys citing executive and professional households’ spending habits. Each item becomes priced at a fixed point in time for every locality utilizing specifications which are standardized.

A number of characteristics set this particular renowned COLI apart from its various inferior competitors. The data is provided for both county and large city MSA metropolitan statistical areas. They organize it by six different categories. These include housing, food, utilities, health care, transportation, and miscellaneous services and goods. Naturally C2ER offer the composite index as their primary one. The data comes out quarterly, no later than three months following its collection, so it is both fresh and relevant. Besides all of the government organizations which rely on their data and COLI in general, the Brookings Institution and Bankrate.com also cite their well-regarded methodology.

All of the various mainstream cost of living indexes rely on the theory which the Russian economist A. A. Konüs developed. The theory is only somewhat hampered by the assumption that the consumers act as optimizers to receive the maximum utility possible out of the money which they possess and can spend. The weakness is that this standard baseline assertion does not always work out to be the case in practice.

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The term 'Cost of Living Index' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.