Review of the COLI Methodology

The ACCRA 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 ACCRA Index, is to divide consumer expenditures into categories, and then select items that represent those categories. The items used in the ACCRA 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 ACCRA 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 ACCRA 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.

Data published for the first three quarters is based on prices submitted by all participating areas. Beginning in February 2008, C2ER began publishing an annual average survey compiled from data submitted in those previous quarters. For urban areas where we have data less than three pricing periods, we developed estimated prices in order to have a complete set of observations. Thus, to calculate the annual average index, we use the actual and estimated prices as our observations to calculate an annual average price for each item. We do not weight any of the prices based on when we observe them. Thus, first pricing period prices receive the same weight in the calculation as third pricing period prices. Then, from the annual average price for each item, we calculate the index using the same BLS Consumer Expenditure Survey weights that we would for any other pricing period.

Price Reporting
C2ER stringently reviews all prices reported, and attempts to eliminate errors and noncompliance with pricing specifications. All price data are obtained from sources deemed reliable, but no representation is made as to the complete accuracy thereof. They are published subject to errors, omissions, changes, and withdrawals without notice.

Exclusion of Taxes
C2ER is fully cognizant that state and local taxes are an integral part of the cost of living, and that tax burdens vary widely not only among states and metropolitan areas, but even within each metropolitan area. Due to the multiplicity of state and local taxes, taxing jurisdictions, and assessment procedures, it is not feasible to calculate local tax burdens reliably. C2ER has opted to produce an index which adequately measures differences in goods and services costs, rather than to produce an inaccurate measure which attempts to incorporate taxes levied on real and intangible property, retail sales, and income.