Cost-of-living Index

A cost-of-living index measures the changes of prices consumers pay for a fixed basket of goods and services over time. While the Bureau of Labor Statistics states that its monthly Consumer Price Index is not a complete cost-of-living measure, the CPI is usually considered a cost-of-living index; indeed, CPI and cost-of-living index are often used interchangeably. A general cost-of-living index like the CPI measures price changes for tens of thousands of items in housing, medical care, education, recreation, and other categories. Selecting items for a cost-of-living index poses major challenges, however, because new technologies and changing lifestyles greatly affect the consumer's shopping basket. Note that a cost-of-living index is computed for specific geographic areas; thus companies will use a cost-of-living index to compensate employees who live in high-cost regions. A cost-of-living index is also frequently used to determine wage hikes. For investors, successive increases in the cost-of-living index point to increasing inflationary pressures that will eventually cause the Federal Reserve to tighten monetary policy.

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