Cost of Living:
Definition, Comparison & Benefits

Cost of living is the amount of money required to cover necessary expenses to maintain a certain standard of living in a particular place. These expenses include housing, food, transportation, taxes, healthcare, and other essential goods and services needed for daily life. The cost of living varies significantly by geographic location due to differences in local economies, housing markets, and regional pricing for goods and services.

Major components of the cost of living include food, housing costs, and energy. Energy costs encompass heating, lighting, and cooking expenses. According to the U.S. Bureau of Labor Statistics, housing accounted for 33.3 percent of annual consumer spending in 2023, making it the largest share of cost of living calculations. Transportation follows at 16.8 percent, food at 12.8 percent, personal insurance and pensions at 12 percent, and healthcare at 8 percent.

Related terms: cost of living index, purchasing power, standard of living, consumer price index

Cost of living is calculated by comparing the prices of a range of goods and services on which consumers spend their money. Costs are broken down and weighted by category, such as healthcare, food, and housing. As prices are gathered by location, you can determine the cost of living in one area compared to another.

To determine your own cost of living, add up how much you spend on essential categories:

• Housing (rent or mortgage payments, maintenance, utilities)
• Food (groceries and basic household items)
• Transportation (gasoline, vehicle maintenance, public transit)
• Healthcare (medical prescriptions, doctor visits, health insurance premiums)
• Education (tuition, school supplies, educational services)
• Taxes (income tax, property tax, sales tax)

Most cost of living indexes use 100 to represent the national average. Cities or regions are then assigned a number either above or below 100 based on how they compare to the national average. For example, according to the C2ER index, Fort Lauderdale, Florida is above average at 117.6, while Dyersburg, Tennessee is below at 89.7.

A cost of living index tracks the prices for commonly purchased items in cities and metro areas, then determines their average price. These items range from specific groceries like a loaf of bread to larger expenses like monthly rent or mortgage payments. Data on average wages and compensation for an area is also collected, allowing direct comparison of overall living costs between locations or with the national average.

The U.S. government does not publish an official cost of living index. However, the U.S. Bureau of Labor Statistics publishes the Consumer Price Index (CPI), which measures changes in the cost of goods and services over time for various geographic areas. Frequently cited cost of living indexes include:

• The Council for Community and Economic Research (C2ER) Cost of Living Index
• Economic Policy Institute (EPI) Family Budget Calculator
• Missouri Economic Research and Information Center (MERIC) Cost of Living Index

The cost of living data is sourced from The Cost of Living Index (COLI) from the Council for Community and Economic Research. Published since 1968, COLI data is recognized by the U.S. Census Bureau and Bureau of Labor Statistics.

The price of goods and services varies by location because of differences in the local economy. The cost of living is often different from state to state, region to region, and city to city. Cities with thriving urban centers tend to have higher costs of living than areas with declining populations and weak economies.

Hawaii was the state with the highest cost of living in the U.S. for 2023, according to research by the Missouri Economic Research and Information Center. Oklahoma had the lowest. Generally, states on the two coasts have a higher cost of living than states in the Midwest or South. In many major cities, space is at a premium, which leads to high housing costs, whereas in more rural locations, the relative abundance of space keeps rents and home prices lower.

Living in a location with a high cost of living means your dollars may not go as far. For example, if you live in Amarillo, TX, and earn a salary of $50,000, you would need to earn 48 percent more to maintain the same standard of living if you moved to Brooklyn, NY. Similarly, $100 would buy significantly more goods and services in a rural community in the South than it might in Los Angeles or New York City.

Cost of living measures how much the basics of life will cost, including shelter, food, transportation, and healthcare. Standard of living is measured by how much comfort you can afford in goods and services. How you view your standard of living can be more subjective, as there is more to life than just the basics.

A higher standard of living might include more spending on luxuries and vacations, as well as the ability to save more money each month. A lower standard of living might entail shopping at discount stores, limiting trips, and having little or no savings. Your ability to spend on additional things beyond necessities will help determine your standard of living.

Even in the same location, people may make different financial choices based on their interests and priorities, leading them to have very different standards of living. Both lifestyles can be viewed as a high standard of living if they are your choice and within your means.

Inflation and cost of living are related concepts, but there are essential differences to understand. Inflation refers to the overall increase in prices across an economy over time and measures changes in the purchasing power of a currency. Cost of living refers to how much it costs to maintain a certain lifestyle and can vary based on many factors, such as where you live and your desired standard of living.

Inflation increases prices, which in turn can drive increases in the cost of living. Generally speaking, higher inflation will lead to faster increases in the cost of living throughout an economy. Economists often use the Consumer Price Index to measure inflation. Your personal cost of living may rise or fall faster than the CPI or inflation due to factors including your location and the goods and services that make up your personal consumption.

Inflation is a broader economic concept affecting everything from consumer goods to investment portfolios, whereas cost of living is more localized and personal, directly influencing household budgets. Inflation erodes purchasing power across the board, but cost-of-living increases provide a targeted response to help individuals maintain their ability to afford essentials.

A cost of living adjustment (COLA) is a mechanism designed to adjust Social Security benefits and other fixed incomes to reflect changes in the cost of living. Its primary purpose is to protect beneficiaries from the eroding effects of inflation. Employment contracts and pension benefits can be tied to a cost-of-living index, typically to the consumer price index (CPI).

The Social Security Administration typically announces COLA adjustments annually in October, based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). These adjustments go into effect in January of the following year. The SSA recently announced a 3.2 percent COLA for 2024, increasing benefits for more than 66 million Social Security beneficiaries.

COLA adjustments provide critical financial relief to several groups:

• Social Security beneficiaries
• Supplemental Security Income (SSI) recipients
• Federal retirees receiving pension benefits
• Veterans and their families receiving VA benefits

Annual escalation clauses in employment contracts can specify retroactive or future percentage increases in worker pay which are not tied to any index. These negotiated increases in pay are colloquially referred to as cost-of-living adjustments or cost-of-living increases because of their similarity to increases tied to externally determined indexes.

Social Security benefits receive cost-of-living adjustments to match increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). COLAs are calculated based on the value of the CPI-W in the third quarter of the year, averaging the values from July, August, and September. COLAs can only increase benefits, so in deflationary years when the CPI-W drops there is no COLA.

The CPI-W measures changes in the prices of a basket of goods and services commonly purchased by urban wage earners, such as food, housing, transportation, and medical care. This index is calculated monthly by the Bureau of Labor Statistics and reflects the average price change over time.

The hold-harmless provision is a key protection for Social Security beneficiaries that prevents Medicare premiums from reducing their net benefit payments and ensures adequate benefit coverage. Without this provision, rising healthcare costs could significantly erode the financial stability of many beneficiaries.

This safeguard ensures that Social Security recipients, particularly those with lower benefits, are not disproportionately burdened by increases in Medicare Part B premiums. The provision maintains their purchasing power even when healthcare costs rise faster than COLA adjustments.

Prices continually change for everything, so your cost of living might fluctuate from month to month or year to year. Several key factors contribute to cost of living increases:

• Inflation: The steady rise in the price of goods and services reduces the purchasing power of money, making everyday expenses more costly
• Supply chain disruptions: Events like natural disasters, labor shortages, or global crises can limit the availability of goods, driving up prices
• Commodity prices: Fluctuations in the costs of essential resources like oil and agricultural products ripple through the economy, affecting everything from transportation to food
• Housing market conditions: Lower mortgage interest rates can increase home buyer purchasing power, pushing up prices that ripple across the economy
• Consumer confidence: External factors like interest rates and consumer confidence play a large role in the price of goods

The CPI measures prices for the major groups of goods and services that consumers pay for, including food, housing, apparel, transportation, medical care, and education. It is important to understand that costs across the board do not rise equally. The CPI measures the average change of prices over time and does not include investment items such as stocks, bonds, or real estate.

Housing usually makes up the largest share of cost of living calculations because it usually accounts for the largest portion of most Americans' budgets. According to BLS data from its most recent Consumer Expenditures analysis, housing accounted for by far the largest share of annual consumer spending at 33.3 percent.

Increases in the cost of housing contribute significantly to cost of living. Shelter is consistently one of the largest contributors to the CPI's all-items increases. In February 2024, shelter inflation rose 5.7 percent, outpacing the overall inflation level of 3.2 percent. Experts expect home prices to rise throughout 2024, meaning the cost of living is likely to continue to go up.

Zillow's Observed Rent Index for February found that asking rents have risen 3.5 percent year-over-year and 29.9 percent since the beginning of the pandemic. These increases in rental costs directly impact the overall cost of living for millions of Americans.

A sharp rise in the cost of living can trigger a cost of living crisis, where purchasing power is lost and, for some people, their previous lifestyle is no longer affordable. The link between income and health is well-established. People who are facing poverty are less likely to seek regular and professional medical advice, receive dental care, or resolve health issues.

Cost of living pressures may lead to household energy insecurity or fuel poverty as well as housing stress. As the cost of living steadily increases, the amount of household income necessary for a financially comfortable life subsequently increases, thus resulting in the number of people who do possess the privilege of a comfortable financial situation decreasing over time.

Larry Summers estimated in 2007 that the lower 80 percent of families were receiving $664 billion less income than they would be with a 1979 income distribution, or approximately $7,000 per family. Not receiving this income may have led many families to increase their debt burden, a significant factor in the 2007-2009 subprime mortgage crisis, as highly leveraged homeowners suffered a much larger reduction in their net worth during the crisis.

The 2022 World Inequality Report shows that the world is marked by a very high level of income inequality and an extreme level of wealth inequality. According to the report, the bottom half of the population owns 2 percent of global wealth, while the top 10 percent owns 76 percent of it. This wealth disparity and its contributions to poverty have had significant negative effects on the general population, such as Europeans choosing not to take prescribed medication due to its detrimental cost, or Americans being forced to spend more money on housing and utilities.

You may reduce your cost of living by looking for steps to lower your expenses. There are several ways to lower your expenses that you might consider:

• Living in a smaller home or apartment to reduce housing costs
• Eating at home instead of dining out to save on food expenses
• Riding your bike or taking public transportation to lower transportation costs
• Canceling unused subscriptions to eliminate unnecessary monthly expenses
• Shopping at discount outlets or during promotional sales to reduce retail spending
• Moving to a less expensive city or state with a lower cost of living
• Consolidating higher-interest debts with a personal loan to save money on interest

If you are deciding whether to move to another state or city, the cost of living probably is not your only consideration. Your social life and future career opportunities are also important factors. In some cases, you might be willing to accept a higher cost of living if it means landing your dream job or living close to family. If so, you will need to manage your budget and possibly adjust your money habits to continue hitting important financial milestones.

You can use an online cost of living calculator to compare the cost of living in your current city or town with your new location. This will give you an idea of how much you need to earn to maintain the standard of living you are used to. If you find that your new location might be difficult to afford, consider the ways mentioned above to reduce your cost of living.

Cost of living is often compared to 3 related economic concepts:

Cost of Living vs. Standard of Living

Cost of living measures how much the basics of life will cost, including shelter, food, transportation, and healthcare. Standard of living is measured by how much comfort you can afford in goods and services. Standard of living is more subjective and includes discretionary spending on luxuries, entertainment, and savings capacity beyond basic necessities.

Cost of Living vs. Inflation

Inflation refers to the overall increase in prices across an economy over time and measures changes in the purchasing power of a currency. Cost of living refers to how much it costs to maintain a certain lifestyle and can vary based on location and desired standard of living. Inflation is a broader economic concept, while cost of living is more localized and personal.

Cost of Living vs. Consumer Price Index

The Consumer Price Index measures the average change of prices over time for a fixed basket of goods and services. Cost of living measures the total amount of money required to cover necessary expenses to maintain a certain standard of living in a particular place. The CPI is often used as a component in calculating cost of living, but they are not the same metric.