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Cost of living is the
cost In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in whic ...
of maintaining a certain
standard of living Standard of living is the level of income, comforts and services available, generally applied to a society or location, rather than to an individual. Standard of living is relevant because it is considered to contribute to an individual's quality ...
. Changes in the cost of living over time can be operationalized in a
cost-of-living index A cost-of-living index is a theoretical price index that measures relative cost of living over time or regions. It is an index that measures differences in the price of goods and services, and allows for substitutions with other items as pr ...
. Cost of living calculations are also used to compare the cost of maintaining a certain standard of living in different geographic areas. Differences in cost of living between locations can be measured in terms of
purchasing power parity Purchasing power parity (PPP) is the measurement of prices in different countries that uses the prices of specific goods to compare the absolute purchasing power of the countries' currencies. PPP is effectively the ratio of the price of a bask ...
rates.


Definition

Cost of living is the
cost In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in whic ...
of maintaining a certain
standard of living Standard of living is the level of income, comforts and services available, generally applied to a society or location, rather than to an individual. Standard of living is relevant because it is considered to contribute to an individual's quality ...
. Changes in the cost of living over time can be operationalized in a
cost-of-living index A cost-of-living index is a theoretical price index that measures relative cost of living over time or regions. It is an index that measures differences in the price of goods and services, and allows for substitutions with other items as pr ...
. Cost of living calculations can be used to compare the cost of maintaining a certain standard of living in different geographic areas. Differences in cost of living between locations can be measured in terms of
purchasing power parity Purchasing power parity (PPP) is the measurement of prices in different countries that uses the prices of specific goods to compare the absolute purchasing power of the countries' currencies. PPP is effectively the ratio of the price of a bask ...
rates.


Cost-of-living adjustment (COLA)

Employment contracts and pension benefits can be tied to a cost-of-living index, typically to the
consumer price index A consumer price index (CPI) is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time. Overview A CPI is a statisti ...
(CPI). A COLA adjusts salaries based on changes in a cost-of-living index. Salaries are typically adjusted annually. They may also be tied to a cost-of-living index that varies by geographic location if the employee moves. In this later case, the expatriate employee will likely see only the discretionary income part of their salary indexed by a differential CPI between the new and old employment locations, leaving the non-discretionary part of the salary (e.g., mortgage payments, insurance, car payments) unmodified. 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. Cost-of-living allowance is equal to the nominal interest minus the real interest rate.


Consumer Price Index (CPI)

When cost-of-living adjustments, negotiated wage settlements and budgetary increases exceed ''CPI'', media reports frequently compare the two without consideration of the pertinent tax code. However, CPI is based on the retail pricing of a
basket A basket is a container that is traditionally constructed from stiff fibers and can be made from a range of materials, including wood splints, runners, and cane. While most baskets are made from plant materials, other materials such as horsehai ...
of goods and services. Most purchases of that same basket require the use of after-tax dollars—dollars that were often subject to the highest ''marginal tax rate''. Consequently, the COLA will necessarily have to exceed the CPI inflation rate to maintain purchasing power. The widely recognized problem known as bracket creep can also occur in countries where the marginal tax brackets themselves are not indexed — COLA increases simply place more dollars into higher tax rate brackets. Only under a
flat tax A flat tax (short for flat-rate tax) is a tax with a single rate on the taxable amount, after accounting for any deductions or exemptions from the tax base. It is not necessarily a fully proportional tax. Implementations are often progress ...
system would a percentage gain on gross income translate into a comparable inflation-offsetting gain at the after-tax level. Some salaries and pensions in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
with a COLA include: *
Social Security Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...
*
Civil Service Retirement System The Civil Service Retirement System (CSRS) is a public pension fund organized in 1920 that has provided retirement, disability, and survivor benefits for most civilian employees in the United States federal government. Upon the creation of a new ...
(CSRS) *
Federal Employees Retirement System The Federal Employees' Retirement System (FERS) is the retirement system for employees within the United States civil service. FERS became effective January 1, 1987, to replace the Civil Service Retirement System (CSRS) and to conform federal ret ...
(FERS) Pensions in Canada with a COLA include: * Canadian Auto Workers union (CAW) Local 200 (Ontario)


Social security benefits


United States

Social security benefits in the United States receive cost-of-living adjustments (COLAs) to match increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The COLAs are made at most annually and 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.


Worldwide survey

The
Economist Intelligence Unit The Economist Intelligence Unit (EIU) is the research and analysis division of the Economist Group, providing forecasting and advisory services through research and analysis, such as monthly country reports, five-year country economic forecasts, ...
produces a semi-annual (twice yearly) worldwide cost of living survey that compares more than 400 individual prices across 160 products and services. They include
food Food is any substance consumed by an organism for nutritional support. Food is usually of plant, animal, or fungal origin, and contains essential nutrients, such as carbohydrates, fats, proteins, vitamins, or minerals. The substance is in ...
, drink, clothing, household supplies and personal care items, home rents, transport, utility bills, private schools, domestic help and recreational costs. The survey itself is an internet tool designed to calculate cost-of-living allowances and build compensation packages for corporate executives maintaining a western lifestyle. The survey incorporates easy-to-understand comparative cost of living indices between cities. The survey allows city-to-city comparisons, but for the purpose of this report all cities are compared to a base city of
New York City New York, often called New York City or NYC, is the List of United States cities by population, most populous city in the United States. With a 2020 population of 8,804,190 distributed over , New York City is also the L ...
, which has an index set at 100. The survey has been carried out for more than 30 years. The most recent survey was published in March 2017.
Singapore Singapore (), officially the Republic of Singapore, is a sovereign island country and city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, bor ...
remains the most expensive city in the world for the fourth year running, in a rare occurrence where the entire top five most expensive cities were unchanged from the year prior.
Sydney Sydney ( ) is the capital city of the state of New South Wales, and the most populous city in both Australia and Oceania. Located on Australia's east coast, the metropolis surrounds Sydney Harbour and extends about towards the Blue Mounta ...
and
Melbourne Melbourne ( ; Boonwurrung/ Woiwurrung: ''Narrm'' or ''Naarm'') is the capital and most populous city of the Australian state of Victoria, and the second-most populous city in both Australia and Oceania. Its name generally refers to a metro ...
have both cemented their positions as top-ten staples, with Sydney becoming the fifth most expensive, and
Melbourne Melbourne ( ; Boonwurrung/ Woiwurrung: ''Narrm'' or ''Naarm'') is the capital and most populous city of the Australian state of Victoria, and the second-most populous city in both Australia and Oceania. Its name generally refers to a metro ...
becoming the sixth. Asia is home to more than five most expensive cities in the top twenty but also home to eight cheapest cities of the cheapest ten.


Other uses

Stipends or extra pay provided to employees who are being temporarily relocated may also be called cost-of-living adjustments or cost-of-living allowances. Such adjustments are intended to offset changes in welfare due to geographic differences in the cost of living. Such adjustments might more accurately be described as a per diem allowance or tied to a specific item, as with housing allowances. Employees who are being permanently relocated are less likely to receive such allowances, but may receive a base salary adjustment to reflect local market conditions. A non-taxable cost-of-living allowance is frequently given to members of the U.S. military stationed at overseas bases if the area to which a service member is assigned has a higher cost of living than the average area in the United States. For example, service members stationed in Japan receive a cost of living allowance of between $300 and $700 per month (depending on pay grade, years of service, and number of dependents), in addition to their base pay.


See also

* Living wage * ACCRA Cost of Living Index * Cost of living in Namibia * United Kingdom cost of living crisis * United States Consumer Price Index *
Consumer Price Index A consumer price index (CPI) is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time. Overview A CPI is a statisti ...
*
Inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
* Price index * Cost of Living Allowance (U.S. Military) * List of U.S. states by adjusted per capita personal income Specific: * List of most expensive cities for expatriate employees * Middle class squeeze *
Cost of raising a child The cost of raising a child varies from country to country. The cost of raising a child is usually determined according to a formula that accounts for major areas of expenditure, such as food, housing, and clothing. However, any given family's act ...
* Walk to work protest


References


External links


Economist Intelligence Unit worldwide cost of living survey results
(requires registration)
Cost-of-Living Calculator
relative to time from American Institute for Economic Research (AIER)
Expatistan
a crowd sourced comparison site
Cost Off Living
a global living cost comparison site {{DEFAULTSORT:Cost Of Living Personal finance