What Is the Cost of Living? Meaning, Index and How to Calculate It

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The cost of living is the amount of money a person or household needs to cover basic expenses such as housing, food, transportation, healthcare and taxes in a particular place at a particular time. It is a relative measure. The same salary can pay for a comfortable life in one city and barely cover rent in another, so cost of living is usually expressed as a comparison: between two locations, or between your income and the expenses it has to support.

What Cost of Living Means

Economists tie cost of living to a standard of living, a defined level of housing, food, transport and other spending. It measures not what you actually spend but what it would cost to maintain that lifestyle in a given place. That makes it useful for comparing locations or years even if your own spending changes.

That distinction matters when you move or take a new job. A higher salary only helps if it rises faster than your expenses: a large paycheck in an expensive metro can buy less than a smaller one somewhere cheaper. What counts is purchasing power, the volume of goods and services your income can actually buy.

What Goes Into the Cost of Living

Most measures group expenses into a handful of categories:

• Housing: rent or mortgage payments, property taxes and insurance. Housing is typically the category that separates expensive areas from cheap ones.
• Utilities: electricity, heating, water, internet and phone service.
• Food: groceries and, in some measures, restaurant meals.
• Transportation: car payments, fuel, insurance, maintenance or public transit fares.
• Healthcare: insurance premiums, doctor visits and prescriptions.
• Taxes: income, sales and property taxes, which vary widely by state and locality.
• Other goods and services: clothing, personal care, childcare, entertainment and similar spending.

Because each household weights these categories differently, an area that is cheap on average may still be expensive for you. A family paying for childcare feels those prices far more than a retired couple does.

How a Cost of Living Index Works

A cost of living index prices a standard set of goods and services in different locations and converts the result into a single number. The baseline is usually 100, which represents the average. A score of 120 means the area costs roughly 20% more than average to live in. A score of 90 means about 10% less.

Cost of Living Index vs. the Consumer Price Index

The two are easy to confuse. The Consumer Price Index (CPI), published by the U.S. Bureau of Labor Statistics, tracks how prices change over time for a basket of goods. It is the standard U.S. measure of inflation. A cost of living index compares prices across places at a given moment.

In practice they work together. The CPI shows how much more your lifestyle costs than it did last year, and a regional index shows how much more or less it would cost in another city. For year-by-year price changes, see the U.S. inflation rate by year.

Common Cost of Living Measures

• The Council for Community and Economic Research (C2ER) produces a quarterly Cost of Living Index for U.S. urban areas, comparing prices for housing, groceries, utilities, transportation, healthcare and miscellaneous goods and services.
• The Missouri Economic Research and Information Center (MERIC) publishes a state-level cost of living data series that ranks U.S. states, the District of Columbia and Puerto Rico.
• Mercer, a global human resources firm, runs an international cost of living survey. Its 2024 edition priced a basket of goods in 226 cities, from eggs and olive oil to gasoline and a haircut.
• The Economic Policy Institute (EPI) maintains a Family Budget Calculator that estimates the income a family needs for a modest but adequate standard of living. Its January 2025 update, built on 2024 data, covers all 3,143 U.S. counties and 613 metro areas.

Each uses a different basket and method, so compare places within one index rather than mixing figures from different sources.

How to Calculate Your Own Cost of Living

Your personal cost of living is the total of what you spend to maintain your current lifestyle. A simple method:

1. Gather three to six months of statements from your bank accounts, credit cards and any digital payment apps.
2. Sort spending into categories such as housing, utilities, food, transportation, healthcare, insurance, debt payments and discretionary spending.
3. Average each category per month. For irregular costs, such as annual insurance premiums or car registration, divide the yearly amount by 12.
4. Add taxes if you are working from gross income rather than take-home pay.
5. Total the categories. The result is your monthly cost of living. Multiply by 12 for the annual figure.

Cost of living can be stated per month or per year. Budgets are usually discussed monthly, while salaries and index comparisons are annual, so keep both sides of any comparison in the same unit.

How to Compare Cost of Living Between Cities

To estimate what salary you would need in a new city to keep the same standard of living, use index values from the same source:

Equivalent salary = Current salary × (New city index ÷ Current city index)

The formula assumes your spending pattern resembles the index’s basket and that both index values come from the same release.

Example 1: Moving to a More Expensive City

Hypothetical figures. You earn $60,000 in a city with an index of 95 and are offered a job in a city with an index of 140.

$60,000 × (140 ÷ 95) ≈ $88,400

You would need roughly $88,400 in the new city to match your current lifestyle. An offer of $80,000 looks like a raise, but in purchasing power it is a step down.

Example 2: Moving to a Cheaper City

Hypothetical figures. You earn $95,000 where the index is 150 and are considering a remote role that pays $80,000 while you live in a city with an index of 100.

$95,000 × (100 ÷ 150) ≈ $63,300

An $80,000 salary in the cheaper city buys more than $95,000 does where you live now, by about $16,700 in equivalent terms.

Example 3: Checking One Category

Hypothetical figures. If housing makes up half your budget and the new city’s housing sub-index is far above its overall score, the composite figure understates your real change in costs. Running the formula on the housing component alone gives a more realistic picture for renters and first-time buyers.

Taxes deserve a separate check. Moving between a state with no income tax and one with a high income tax can shift take-home pay enough to change the conclusion.

Where Living Costs Are Highest and Lowest

In MERIC’s Q3 2025 data, Hawaii had the highest cost of living of any state, with an index of 179.7, and Oklahoma had the lowest, at 84.4. California, Massachusetts, the District of Columbia and Alaska were also near the top, while Mississippi, Alabama and West Virginia joined Oklahoma near the bottom.

Among urban areas, C2ER’s Q3 2025 index ranked Manhattan as the most expensive, followed by Honolulu, San Jose and San Francisco. Tupelo, Mississippi, ranked as the least expensive, with several Texas metros including Harlingen, McAllen and Amarillo close behind.

Internationally, Mercer’s 2024 survey ranked Hong Kong, Singapore, Zurich, Geneva and Basel as the five most expensive cities, with Bern in sixth, making four of the top six Swiss. New York City ranked as the costliest U.S. city in that survey, followed by Los Angeles, Honolulu and San Francisco.

Cost of Living and Wages

Rising living costs fuel a long-running debate over the gap between the minimum wage and the income needed for an adequate standard of living. The federal minimum wage has been $7.25 an hour since 2009. Many states set higher minimums, and 21 raised theirs on January 1, 2025.

For individual workers, the practical question is whether raises outpace the rise in living costs. A 3% raise in a year when prices rise 4% is a cut in real income.

Cost-of-Living Adjustments (COLAs)

A cost-of-living adjustment (COLA) is an increase in a payment designed to offset inflation. The best-known example is Social Security: automatic annual COLAs for Social Security and Supplemental Security Income (SSI) benefits have been in place since the 1970s. The Social Security Act requires these adjustments to be based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The size of the adjustment follows inflation. The COLA announced for 2023 was 8.7%, reflecting high post-pandemic inflation, and federal SSI payment levels rose by the same percentage. The adjustment was 3.2% for 2024 and 2.5% for 2025; the Social Security Administration noted an average of 2.6% over the prior 10 years.

COLAs also appear in labor contracts, leases and other agreements with escalation clauses. These often tie periodic increases to the CPI and specify how often adjustments happen and which payments change. Some employers grant COLA-style raises as well, but unlike Social Security they are not required to.

FAQs

The Bottom Line

Anyone weighing a move, a job offer or a remote role should judge pay by purchasing power rather than the headline salary. Use index values from a single source, check housing and state taxes separately, and compare raises against inflation. A bigger paycheck in a costly city can leave you worse off, while a smaller one somewhere cheaper can stretch further.