The traditional method for quantifying the cost of living is to aggregate the prices of certain basic goods and services and compile indices that can be compared across different locations and over time. Such a method allows for more universally objective assessments. Such indices typically include prices for housing, food, health care, and other goods and services that are to be considered basic needs. The downside of such measures is the absence of assessments on quantities of consumption and quality of life.
A prominent example of a cost of living index is the U.S. Consumer Price Index (CPI) that is compiled by the U.S. Bureau of Labor Statistics based on prices of a certain market basket of goods and services across different urban areas. The cost of living in the United States is rising continuously. The 2018 CPI was 255.66 compared to an index value of 100 during the base period, between 1982 and 1984. Simply put, prices in the United States have more than doubled over the last 35 years.
The fact that the CPI is based on a fixed basket of goods and does not account for substitution between item categories, limits its suitability as a measure of the cost of living. That is why the Bureau of Labor Statistics introduced the Chained Consumer Price Index. Based on the same bundle of goods, it allows for substitution between categories and is thus considered a more accurate indicator for changes of the cost of living.
Despite rising prices, the United States does not have the highest cost of living in the world. The Economist’s Big Mac Index suggests that the country with the highest cost of living in July 2020 was Switzerland. However, the cost of living appears much more problematic in Nairobi if labor remuneration is taken into account.
