For more than 100 years, economists have been figuring out how far our money will stretch. They have been analyzing several factors that affect the way we spend money. The information is used in what is called the cost-of-living index, and it is a vital tool for economists and government officials.
Analysis of the cost of living started in 1890. The initial title was "Cost-of-living Index." The calculation process for measuring the cost of goods was refined and the report was renamed CPI or Consumer Price Index. That was introduced around World War I, when prices increased dramatically. The government initiated COLA, or Cost of Living Adjustments, in 1975. The increase of benefits in Social Security are based off of the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. Before then, any increase due to the rising costs of living had to be made by special legislative action.
The reason for a cost-of-living index is to set certain minimum requirements for means of living. Social Security, welfare and minimum wage are constantly adjusted to take into account the cost of living. By analyzing the index, you can make an adjustment in your lifestyle. If you are looking to relocate, you can make an assessment on where to go based on your preferences. In some cases, companies take into account the cost of living when giving a raise or promotion.
When assessing a cost-of-living report, know that it is an average of categories. The cost of living should be taken into consideration when planning an event such as moving, changing jobs and buying goods.
Several streams of data go into calculating the cost of living average. These statistics look at job salaries, and the costs of housing, education and food. The areas with higher and lower costs of living have several qualities. Cities in the higher bracket tend to have higher paying jobs, pricier homes and a larger population. In rare instances, smaller towns can have a higher cost of living.
There is a difference between the cost of living and CPI. Although the framework for CPI was carved out of the cost-of-living index, the importance of each is clearly defined. The cost of living index looks at many factors that affect people’s financial decisions. They both analyze such things as food, housing and clothing costs. The cost-of-living index includes factors that are hard to price such as a populace's education level, effects of crime and the quality of water and health. Both are important in gauging the health of the economy.