The cost of living is the cost of maintaining a certain standard of living. A cost-of-living index, such as the United States Consumer Price Index is a price index that measures relative cost of living over time. Such indexes are constructed to have a value of 100 in a given year (or period, or place), the base. Thus the Consumer Price Index is relative to the base. An index value of 110 indicates that the current cost of living is ten percent higher than in the base year. Because the index provides measure of the change in the cost of living, it is has no units. There are many different methodologies that have been developed to calculate cost-of-living indexes, including ones that allow for substitution among items as relative prices change. The Cost of Living is an EP by The Clash released in 1979. ... In economics, business, and accounting, a cost is the value of inputs that have been used up to produce something, and hence are not available for use anymore. ... The standard of living refers to the quality and quantity of goods and services available to people and the way these services and goods are distributed within a population. ... CPI-U 1913-2004; Source: U.S. Department Of Labor The U.S. Consumer Price Index is a time series measure of the price level of consumer goods and services. ... This article does not cite its references or sources. ... In economics, one kind of good (or service) is said to be a substitute good for another kind insofar as the two kinds of goods can be consumed or used in place of one another in at least some of their possible uses. ...

Another kind of cost-of-living index compares the cost of living not across time but across locations, such as metropolitan areas. A value of 100 for the index would indicate a place with equal overall costs as the base location. A value of 200 would indicate a place where the overall cost of living is double that of the base location. This article does not cite any references or sources. ...

Types of Indexes

A Konüs index is a type of cost-of-living index that uses an expenditure function such as one used in assessing expected compensating variation. The expected indirect utility is equated in both periods. This method can be used to introduce risk aversion into cost-of-living indexes. In economics, compensating variation (CV) is a measure of utility change introduced by John Hicks (1939). ...

Uses of Cost of Living Indexes

A cost-of-living index is a useful way to consider welfare changes caused by changes in factors exogenous to the individual household, such as inflation, and the monetary, fiscal, and trade policies of governments. One drawback to simple price change measurement is a difficulty in measuring changes in the quality of goods. Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Monetary policy is the process by which the government, central bank... Fiscal policy is the economic term that defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. ... This article does not cite any references or sources. ...

Cost-of-living allowances (COLA)

Employment contracts, pension benefits, and government entitlements (such as Social Security) can be tied to a cost-of-living index, typically to the consumer price index (though such CPI increases may not meet the "indifference" objective if the increase is then reduced by income taxes). A cost-of-living allowance (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. It has been suggested that this article be split into multiple articles accessible from a disambiguation page. ...

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. Most economists and compensation analysts would consider the idea of predetermined future "cost of living increases" to be misleading for two reasons: (1) For most recent periods in the industrialized world, average wages have actually increased faster than most calculated cost-of-living indexes, reflecting the influence of rising productivity and worker bargaining power rather than simply living costs, and (2) most cost-of-living indexes (see above) are not forward-looking, but instead compare current or historical data. Additionally, simple arithmetic requires that any increase subject to income tax will necessarily have to exceed the inflation rate to result in an inflation adjusted after-tax salary level. Thus for real purchasing power (or any after-tax income) to merely keep up with inflation, gross income must increase faster than cost-of-living indexes. Economists are scholars conducting research in the field of economics. ... In economics, bargaining power refers to the ability to influence the setting of prices or wages, usually arising from some sort of monopoly or monopsony position -- or a non-equilibrium situation in the market. ...

Consequently, where using CPI as a proxy for a Cost-of-Living index may fall short is in accounting for subsequent income taxes on COLA increases. As a means for adjusting gross wages/salaries/incomes CPI calculations may fail to gross-up for 'progressive rate marginal taxes'. Indexed increases are generally taxed at the highest marginal tax rate, whereas the consumer expenditure market basket corresponds to the consumer's generally lower average tax rate. 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-rate tax system would a percentage gain on gross income translate into a comparable inflation-offsetting gain at the after tax level.) The term market basket or commodity bundle refers to a specific type of basket, or a fixed list of items used specifically to track the progress of inflation in an economy or specific market. ...

Other uses of the term "Cost-of-living allowance"

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. This article or section does not cite any references or sources. ...

A cost-of-living allowance is frequently given to members of the U.S. military stationed at overseas bases. For example, service members stationed in Japan receive a cost of living allowance of between $300 and $700 per month (depending on pay grade), in addition to their base pay. The United States Armed Forces are the military services of the United States. ... Wikipedia does not yet have an article with this exact name. ... The United States Forces Japan (USFJ, Japanese: ) refers to the various divisions of the United States Armed Forces (USAF) that are stationed in Japan. ... // PAY GRADE In the United States Military, a Pay Grade is the rate at which all military members receive their basic pay. ...

See also

• Price index
• Consumer Price Index
• Inflation

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References

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External links

• Cost-of-Living Calculator from American Institute for Economic Research (AIER)
• Cost of Living Wiki