Table Of Contents
What Is The Cost Of Living Index?
A Cost of Living Index (COLI) refers to a statistical measure for comparing the relative expenditures of living standards in various regions of a state, country, or geography. Its purposes include tracking variations in basic expenses across time and helping organizations and individuals make critical decisions concerning relocation, financial planning, and work.
The expenses included in COLI are clothing, childcare, housing, healthcare, energy, food, and transportation. The Council for Community and Economic Research provides real-life COLI. It becomes useful when comparing the cost of living differences between two cities where the base city is taken as 100, and the destination city can be indexed against it.
Table of contents
- The Cost of Living Index (COLI) is a statistical tool that compares the relative cost of living in different regions or areas within a state, country, or geographic location.
- Its primary function is to monitor changes in living expenses over time, assisting individuals and organizations in making important decisions related to relocation, financial planning, and employment.
- It compares living costs between places using a basket of goods, helping with decision-making, but limitations in its coverage and accuracy can mislead individuals and businesses.
- It compares the long-term changes in maintaining a specific lifestyle and expenses between two places, while the Consumer Price Index measures the average fluctuations in prices for a fixed set of goods and services purchased by consumers.
Cost Of Living Index Explained
The cost of living index is a metric to assess the variation in the cost of living at a place with time by comparing two places concerning the prices of a basket of services or goods consumed by local households. One can calculate it by comparing the prices of the cost of services and goods in a base location or period to that of its cost in a new place or current period.
Let us see how it all works:
COLI can be expressed as a whole number, where 100 represents the national average of a nation. Then, it becomes the benchmark to compare the COLI of different places within the nation to know the cost of living. If a place or city has the same COLI of 100 as the national average, its cost of living is the same as that of the nation. Moreover, if a place has a COLI of more than 100, its cost of living is higher or more expensive than the national average.
Furthermore, if the COLI of a place falls below the national average, its cost of living is lower or cheaper.
COLI can be used to compare the cost of living in two places easily. It also helps make the right decisions regarding relocation for job purposes and migrating. It assists business policymakers in making correct policies, budgeting, and financial planning.
It does not include vital factors like housing costs, taxes, and transportation costs to give a clear picture of the cost of living at a place, which may mislead some into making wrong decisions about migration or job search. Additionally, some places or countries do not update the COLI, which may be inaccurate for practical purposes.
The International Cost of Living Index (ICLI) assesses the cost of living in different global locations using real expenses as a benchmark. It considers essential aspects such as housing, transportation, shopping, dining out, etc. Published by reputable organizations like Numbeo, the ICLI provides valuable insights for individuals and businesses contemplating relocation or international employment opportunities.
Effect On The Financial World
In the financial world, it impacts the cost-of-living adjustments within wage agreements, investment decisions, and salary negotiations. It has a key role in determining the purchasing power of different currencies as COLI of various places affects the exchange rates accordingly. In the USA, COLI determines the cost of living adjustment (COLA) for social security beneficiaries. COLA is made to adjust to the prevalent inflation rate in the US.
Depending on their profile and needs, it has various implications per individual or business. People can know the amount of money they need to earn to maintain the same standard of living in a new location. Likewise, businesses use it to determine the correct cost for their services and goods at new locations. This helps them remain competitive and successful in a specific market.
Examples
Let us look at some examples to understand the topic better.
Example #1
Suppose Noah, who is a new college graduate, wants to move out of their native place to various cities, including New York, for job purposes. Hence, Noah consulted the Worldwide Cost of Living Index by Economist Intelligence Unit in 2022 to make the right move. As per the list, Noah found that New York and Singapore are the most expensive cities, tied for the No. 1 spot. Therefore, Noah concludes that she should select other cities with a lower cost of the index where she could survive and find a good job to lead a well-settled life.
Example #2
According to recent studies, the used car segment has driven inflation in April by 4.4 %. As a result, people are finding it difficult to buy basic cars for commuting to and fro to the office and home. It happened because wealthy buyers demand high-end SUVs, limiting the availability of basic cars. This increase in car prices has contributed to the cost of living too. Thus, it has created an apparent increase in the index numbers.
How To Interpret?
COLI is always used to compare the standard of living between two places. Hence, to interpret it properly, one has to do the following:
First, decide on the location against which the index value will be measured. Second, compare the index value of the other location with the base location. Then, analyze the result of the comparison meticulously. If the index value of the other place has a higher value than the base location, then its cost of living is higher than the base location. Furthermore, if the index value comes out to be lower than the base location, it has a lower cost of living.
Nevertheless, one must consider other factors like job opportunities, local taxes, transportation costs, and housing prices before deciding to relocate. Additionally, one must also consider the personal spending habit before making any relocation decision. And finally, the sources used for gathering COLI must be reliable and multi-sourced so that the information reaches the perfect state. As a result, the relocation would become successful.
Cost Of Living Index vs Consumer Price Index
The table below gives the differences between COLI & Consumer Price Index (CPI):
| Cost of Living Index | Consumer Price Index |
|---|---|
| It evaluates the rate of change in sustaining a particular lifestyle, standard of living and expenses over time between two places. | The consumer price index measures the average price variation of a fixed set of goods and services the customer pays. |
| It adjusts itself based on spending habits and income. | It fails to adjust itself based on spending habits and customers' income. |
| The cost of living index can be calculated based on trends prevalent in a specific set of populations. | It can be calculated based on the fixed services and goods basket. |
| It considers the quality of goods for forming its index. | The consumer price index does not include the quality of goods in its indexing. |
| Any group can use it to get a more complete idea of inflation. | It gives a general measure of inflation for the whole economy. |
Frequently Asked Questions (FAQs)
The cost-of-living index is calculated by comparing the average expenses associated with various products and services in different areas. It considers factors such as housing, transportation, groceries, medical care, and other costs when assessing the relative cost of living in various locations.
To create a comprehensive and reliable cost-of-living index, it is crucial to accurately capture the expenses associated with residing in a particular location. Beyond essential factors like education, leisure activities, and overall quality of life, it should encompass vital expenditures such as housing, utilities, healthcare, and transportation costs using indexes like Numbeo, Expatistan, Mercer, and The Economist Intelligence Unit.
The cost-of-living index provides individuals and organizations with valuable insights into the relative affordability of different locations. The cost of the index number is a continuously changing value and is periodically published. One can look up online for these numbers any time.
Recommended Articles
This has been a guide to what is Cost of Living Index. We compare it with the consumer price index & explain its example, implication, & how to interpret it. You can learn more about it from the following articles –
