In this article, we will look at the Cost-of-living index (COLI), and find out what it is useful for. We will look at what items of expenditure it takes into account, how it is calculated, and how it differs from the Consumer price index (CPI).

What is the cost-of-living index?

The Cost-of-living index (COLI) is a price index that captures changes in the relative cost of living over time and across regions. It characterises changes in the prices of consumer goods and services in relation to a fixed set of goods and services that make up the basket of goods and services for certain categories of the population.

COLI is an estimate of how much money a person needs to live in a certain place. It is therefore a widely used indicator to compare living standards in different regions.

The index is not an official government statistic but is calculated by various private companies around the world. This indicator can help a person determine whether the income or wages they receive are sufficient to cover basic expenses where they want to live and work.

What the cost-of-living index is made up of

Expenditure items that are accounted for by COLI:

• Housing (rent or mortgage payments)
• Food
• Clothing
• Utilities
• Transport
• Health
• Education
• Childcare
• Insurance
• Entertainment
• Taxes

How the cost-of-living index is calculated

There are many different methodologies that have been developed to calculate the cost of living index. The general formula compares the costs to the consumer of one year's prices with the equivalent costs of another year's prices. In a simplified format, it looks like this:

P = C(u,p1) / C(u,p0)

• P is the cost-of-living index
• C(u,p1) is the cost to the consumer for a given set of prices p1
• C(u,p0) is the cost to the consumer for a given set of prices p0

Many COLI calculations use a "base" cost of living, which is usually taken as 100. This base can be the cost of living in Chicago, for example, or an average of several regions. Other regions are measured in relation to the baseline. If it is 20% more expensive on average to live in New York than in the "base" city, the COLI for New York would be 120.

It is also important to consider the average income for the chosen region. For example, a city in the south of the US may have a lower cost of living than most cities on the east or west coasts. However, the average income in that southern city may be lower than the cost of living there.

There are many different calculators for comparing the cost of living. For example, you can compare the cost of living for one person or family in different regions of the US with the Economic Policy Institute's Family Budget Calculator.

The difference between COLI and CPI

The government and the Central Bank of a country are usually guided by changes in the official, regularly published Consumer Price Index (CPI) when estimating the rate of inflation. This is essentially the change in the value of a basket of basic goods and services chosen to measure price growth in the economy.

The COLI is a cost-of-living measure that more fully accounts for changes in consumption expenditure associated with current economic conditions. It estimates the entire set of goods and services consumed by households, also taking into account those received free of charge from government or non-profit institutions.

COLI:

• This is not part of the official government statistics but is calculated by many private companies around the world
• Good for comparing living costs in different regions
• Used by corporations to calculate compensation packages, and by unions in wage negotiations

CPI:

• As a part of the official government statistics, this is the main indicator of inflation in the country
• Calculates a basket of 80,000 products and services from 23,000 points of sale and service

Conclusion

A cost-of-living index is a useful tool for estimating how much money a person or family needs to live in a certain area, and how this indicator changes over time.

The cost-of-living index can influence the choice of activities, as well as where to live and work. COLI helps to determine whether the income or wages you receive are enough to cover your basic expenses.

Material is prepared by

Victor Gryazin

Has traded in financial markets since 2004. The knowledge and experience he has acquired constitute his own approach to analyzing assets, which he is happy to share with the listeners of RoboForex webinars.