How is the cost of living index calculated?

There is no official cost of living index created or reported by the U.S. government. Unofficial indexes are offered by multiple organizations to track costs of living in different regions. An example is the ACCRA Cost of Living Index (ACCRA COLI), produced by the Council for Community and Economic Research.

Many people confuse the Consumer Price Index (CPI), from the Bureau of Labor Statistics with a cost of living index. However, the CPI only tracks a basket of consumer goods over a period of time, loosely measuring inflation; it is not intended to measure the actual costs of living in any given area. A true cost of living indicator would more accurately measure changes over time in the total amount of money required in order to maintain a specified standard of living. Additionally, a cost of living indicator would factor 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. This process of shifting expenditures is commonly referred to as substitution. Substitution means that the cost of maintaining a certain standard of living is probably somewhat less than the pure calculation of increased prices, since consumers can mitigate price increases by utilizing a less expensive substitute.

The costs of consumer goods and services vary between different urban and suburban residential areas. Cost of living indexes are meant to compare the expenses an average person can expect to incur to acquire food, shelter, transportation, energy, clothing, education, healthcare, child care and entertainment in different regions. Another way to interpret what a cost of living index represents is to ask the question: "How many goods and services does a given sum of money purchase in a certain location?" For instance, $100 tends to purchase more goods and services in Denver than it does in New York City. (For related reading, see: Top 10 Most Expensive Cities in the U.S.)

Most cost of living indexes set a base cost of living, often represented by 100. This base can either be the cost of living in one region—for instance, Chicago could be pegged as the base city and its cost of living set at 100—or it can be an average of multiple regions. Other regions are measured against the base region and assigned a cost of living number accordingly. If, on average, it is 20% more expensive to live in Boston than in the base city, Boston's cost of living number is 120. (For related reading, see: How the Cost of Living Affects Your Income.)