Cost of Living vs. CPI

The official measures of inflation don't jibe with our everyday experience. Why? What makes CPI misleading? What alternative measure would be more consistent with our experience, with what most citizen want inflation to measure?


  1. Official CPI estimates
  2. Contrasting the old and new economies
  3. Tradeoffs
  4. Common Errors Interpreting CPI
  5. Alternative Measure for Cost of Living

Draft: Dec 2013

  • official CPI from the BLS
  • related estimates from the BEA

Official CPI Estimates:

Our government produces two sets measures to estimate inflation or the cost of living. The one set is produced by the BLS and includes the CPI and PPI. The other is produced by the BEA.

Both measures are misleading. Neither represents what most citizens want inflation to measure. Most citizens want the cost of living estimates to tell us how much money we need to stay out of poverty.

Why doesn't the CPI measure this? The BLS's CPI estimates the costs of a standard basket of goods. The BEA's deflator measure looks at the whole economy. As the economy evolves the goods and services we need to stay out of poverty change. The standard basket of 1960 does not represent the needs of the new millennium.

a more accurate CPI estimate from ShadowStats
This is easy to demonstrate by contrasting what a typical citizen would need to get a middle class job before 1960 to what a citizen would need to get a middle class job now. The failure of the standard basket estimate of inflation is painfully evident in the contrast.

Contrasting Pre-1960 to Post-2000

What did a typical citizen need just to find opportunity? How have our basic needs changed with the economy?


High school technical classes: free
On the job training - periodic: free
College degree: $6000 /yr * 4 years
Continuing education: $1000 every few years
Shoes: $200 / yr
Car + fuel + insurance: $4000 / yr
Newspaper want-ads: $50 / yr
Computer + internet: $600 / yr
near work, stores, & services
frequent relocation for work

Education: Before 1970 an American stood fair odds of entering the middle class without a college degree. Many skilled labor jobs paid enough for one income to support a family at a middle class level. Most high schools offered classes so that boys could develop those skills. Many companies offered on the job training at the company's expense.
Now its almost impossible for a citizen to stay out of poverty without a college degree. The cost of college has risen much faster than the official rate of inflation. Frequently workers need retraining that they are required to pay for themselves. Education has become a mandatory cost for citizens which is not included in the standard basket calculation for inflation.

Transportation: Before 1960 a typical American could get to work, services, and shopping without a car. They might have relied on mass transit for some transportation. Back then, looking for a job was called "hitting the pavement" because a person would walk to all the local companies to find work.
Now, due to a major shift towards suburbanization resulting from a combination of factors including zoning laws and subsidies and regulations that favor large corporate chains over small businesses most Americans can not accomplish anything without depending on a car to do it. Many poorer Americans live in food deserts. They can not find access to food, jobs, or services without a serious drive. A personal car and all the related expenses: fuel, maintenance, and insurance are part of the mandatory costs of being an American citizen. Cars must be added to the standard basket calculation for inflation. The increased distances we must drive to find jobs, goods, and services must also be added.

Resources: Before 1990 most jobs were advertised in local newspapers. Before 1970 a person could go to the company and apply in person. Now most jobs are listed on the internet. Most jobs require computer skills. Computer skills are changing so rapidly that a person needs constant practice to keep up. A home computer with internet access is now mandatory for staying out of poverty and improving one's position in the economy. Computers and internet access are now necessities that must be considered in the cost of living.

Housing: During this same period the cost of housing has gone up significantly. The portion of income that Americans spend on rent and mortgages is now much higher than it had been back in the 1950s. Many Americans now spend more than 50% of their income on housing. Increased instability increases the number times an American will be expected to relocate to find work. Relocation is very costly.


Each choice we make has an initial cost and a consequence. Most consequences carry a cost. For the estimate of the cost of living to be useful, it must include the consequential costs we accept when we purchase necessities.

 <---->
commute & security
long-term investment
hedging for instability
delayed purchase
loan interest costs or rent
initial costs
replacement cycle costs

Food vs Health: Many poor Americans have, by necessity, chosen cheaper foods. However, diets overly dependent on GMO grains grown in pesticides and glyphosate consumed along with artificial sweeteners are linked to insulin resistance, diabetes, and other health problems. Cheaper foods lead to higher medical costs. An accurate estimate of the cost of living must consider food costs together with food related medical costs. Food related medical costs have been rising rapidly since the mid-1990s.

Housing vs. Commuting: A person can find cheaper housing. But the cheaper housing typically requires a longer commute to work. Cheaper housing is likely to be in a more crime-prone neighborhood. Cheaper housing may also come with other hidden side costs such as exposure to noise, exposure to foul industrial odors or toxic pollutants, etc. All these costs must be considered together since lower housing costs typically result in higher consequential costs.

Upfront Costs vs. Delayed Costs: Many costs, such as housing and education, require a person to make a tradeoff between initial costs and delayed costs. They also challenge a person to hedge their investments against related risks. The local businesses might close right after a worker purchases his house. A new technology might displace the career a person trains for. Saving for a down-payment will reduce interest costs but will also increase rent costs during the time one is saving. None of these tradeoffs and risk costs are easily calculated. But they all make up part of the cost of living. The instability of the economy comes at a very high cost not currently considered in the CPI. The losses that citizens suffered in the crash of 2008 should have been considered as risk-costs related to their housing, investment, and career decisions in the preceding decade.

The CPI is calculated with the assumption that Americans can purchase cheaper goods as they are developed. So as new cheaper products replace older costlier products Americans can have the same quality of life by purchasing goods with lower production costs. But this assumption ignores the consequential costs of switching to cheaper goods. Failure to include consequential costs in CPI estimates resulted in severely underestimating the real cost of living - the cost of staying out of poverty.

Related pages at this site


Related discussion around the web


Implications & Common Errors Interpreting CPI

CPI underestimates Cost of Living: From our observations above we can guess that the official CPI estimates significantly underestimate the real cost of living. Items once considered luxuries or comforts are now necessities. Some necessities costs (eg: housing, education, health care) have risen significantly faster than average prices overall. The average price of goods does not indicate the cost of living. The costs of necessities, along with their consequential costs, measure the cost of living.

Individual Factors: The cost of living is not the same for all. For the young and the poor the costs of education, transportation, and housing dominate their budgets. For the old health care dominates their budget. For parents child care dominates their budget. Any policy that applies the same CPI calculation to all citizens and all programs is intrinsically wrong.

Low Wage Work Prevents Opportunity: Workers must have both enough time and enough money to retrain for better find opportunities. Since higher education is required to stay out of poverty, any labor or service job that requires overtime work just to cover necessities constitutes a poverty trap not an opportunity. The cost of living correlates to a pay rate is sufficient for a person to find opportunities for advancement. Many service jobs now offer workers no chance for skill development and pay well below the rate that would allow the worker to retrain on his own.

Personal Experience Ignores Greater Economy: Some older citizens use their own situation or other anecdotal evidence to evaluate CPI, employment, or strength of the economy. This is incorrect. In a normal economy people gradually move up the economic ladder to higher status and pay. To say, "I am doing much better than 30 years ago," does not evaluate the economy. One needs to ask, "How are young people in similar situations to myself doing compared to when I was the same age?" Or conversely ask, "How did somebody my age and skill level do 30 years ago?" These are the questions correct for personal mobility within the economy. We see strong indicators that relative income and opportunity were higher 30 years ago than now.

Federal Budget Growth Gets Measured Incorrectly: Another popular error is expressed by some activist groups that measure the federal budget in terms of inflation. This is incorrect because the population has increased also. The population both pays the budget and receives the benefits. A larger population means both more citizens paying in and more citizens receiving benefits from the expenditures. Thus, we can correct for this error by measuring the budget in terms of both population and inflation. Or we could measure the budget in terms of percentage of GDP.

An Alternative Measure for Cost of Living

What we really want when we talk about cost of living is a measure that will estimate how hard it is to stay ahead of poverty. We want to know whether people need to work longer and harder to stay out of poverty or do they have more time to enjoy life. Cost of living would be more accurately measured in terms of how many annual hours of work for money are required to keep a family out of poverty. Working for money includes indirect work such as education-training and commuting to a job.

Over the last 40 years in America, many have seen vacation time decrease, commuting time increase, more working through lunch, and more taking work home. Forty years ago it was common to hear of a single income supporting a family of five. Now, it's common to hear of two incomes supporting a family of three. The standard basket estimate of CPI says that we have more. But time-at-work indicators suggest that we are actually poorer.

Recent reports showed that Wal-Mart and McDonalds employees would need to work about 60 hours a week just to stay at the poverty line. Neither company offers real marketable skills or significant on the job training. A person working 60 hours a week does not have time left for education. That pay rate wouldn't even cover education costs. The cost of living compared to the wages of service sector jobs is very high. The real cost of living (prices / income) has risen significantly.
One approach would be to ask how long a worker has to work to get a certain share of the GDP at a certain wage. A starting point would be to look at minimum wage. In 1971 minimum wage workers required the least time to acquire a share of the GDP. In 2006, workers had to work 2.5 times longer than their 1971 counterparts to acquire the same share of the GDP. A person working over 50 hours a week doesn't have time left for education.
1 = 40 hours / week in 1967

Since much of our economy fluctuates with the price of oil (gasoline) we might reference inflation in terms of how many hours of work are required to purchase a gallon of gas. In 2008 a minimum wage worker had to work about 2.7 times longer to purchase a gallon of gas than he did in the 1990s.

Both of these quick checks suggest that minimum wage is now less than half of what it used to be.



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