Review of the COLI Methodology
The Cost of Living Index is designed to provide the best possible means to compare cost of living differences among urban areas based on the price of consumer goods and services appropriate for professional and managerial households in the top income quintile.
The Cost of Living Index rests on the premise that prices collected at a specified time, in strict conformance with standard specifications, provide a sound basis for constructing a reasonably accurate gauge of relative differences in the cost of consumer goods and services.
Consumer expenditures cover an almost limitless range of goods and services, and no index of consumer buying can encompass all of them. Since we can’t price everything, what do we do? The standard approach, used in the Cost of Living Index, is to divide consumer expenditures into categories, and then select items that represent those categories. The items used in the Cost of Living Index thus are surrogates for entire categories of consumer spending. For this approach to work, price differences among urban areas for the items in the Index must accurately reflect differences for the categories they represent.
The Cost of Living Index consists of six major categories: grocery items, housing, utilities, transportation, health care, and miscellaneous goods and services. These major categories in turn are composed of subcategories, each of which is represented by one or more items in the Index. Separate component indexes are published for each of the six major categories. We’re not concerned with the extent to which consumers actually purchase the individual items in the Index. The 60 items have been chosen solely to show interarea price differences in the categories they represent. What’s important, in calculating the Index, is the ratio of an urban area’s average price to the average price of the same item nationwide. When we use a pound of whole frying chicken to represent poultry products, we’re assuming that if an area’s price for this item is 10% above the nationwide average, its prices for poultry products as a whole also are about 10% above the nationwide average.
How much the ratio for each item contributes to the Index
is determined by the distribution of consumer expenditures among the
categories covered by the Index. The share of consumer spending devoted to
the category each item represents determines that category’s importance, or
weight, in the Index. The Cost of Living Index Committee has adopted
the weights based on data from the U.S. Bureau of Labor Statistics’ 2004
Consumer Expenditure Survey, using the data on the proportional distribution
of expenditures by households in which the reference person has a
professional or managerial occupation and by households in the upper
quintile of income.
Exclusion of Taxes