Question: Is the Consumer Price Index (CPI) a cost-of-living index?
Answer: The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. The Bureau of Labor Statistics (BLS) has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, not a straightforward alternative to the CPI.
A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain “utility level” or “standard of living.” Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing, that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this to also take into account changes in other governmental or environmental factors that affect consumers’ well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime that would comprise a complete cost-of-living framework.
BLS: Consumer Price Index – Question and Answer
Two criticisms of the CPI-U are not discussed. One is the necessary limitations of the index: Despite its broad coverage of prices, the CPI-U does not track the cost of many factors that affect a person’s well-being – for example, crime, traffic, pollution, the prevalence of disease, the quality of education, and civil liberties. Cost-of-living measures rarely include such factors because few market prices or consumer expenditures are associated with them, making it essentially impossible to define and measure changes in their price or value.
A second criticism of the CPI-U is that, for technical reasons, the index may overstate changes in the cost of living. Such arguments of upward bias were stronger in the 1990s, before BLS instituted a number of technical improvements. Some analysts argue the opposite, that the CPI-U actually understates inflation. Those criticisms go beyond the scope of this brief.
CBO – Explaining the Consumer Price Index