*Prices of different products and services including essentials, such as food, gas, and utilities, increase every year. Increasing prices mean that the same amount of money can buy less than before. Consumer Price Index (CPI) tracks the price of a basket of goods and services. Inflation refers to the change in CPI or the change in the prices of the basket of goods and services. The Federal Reserve aims to keep a long-term annual inflation rate at 2%, but recently annual inflation in the US has risen to 7.5%. This steep increase in inflation led to a noticeable rise in the cost of living all over the USA.
The cost of living is a metric that tells how much an average person or a household should spend in a certain area during a certain period of time. CPI is one of the measures that can be used to estimate the cost of living, but it can be estimated in other ways that may differ from CPI in calculations and weights of certain products. Additionally, prices of similar items may change differently in different regions of the USA. For example, San Francisco in California may have much higher inflation than Lawrence in Kansas during the same period because of different consumer spending habits. Because of that, calculating the cost of living in different cities before moving is important to understand how much you will be expected to spend after moving.
Inflation affects the cost of living every year. Because of that, $100 in 1920 could buy the same amount of products as around $1,300 could buy in 2020. This means that the cost of living increased by around 1,200% over 100 years, which seems like a large increase.
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What Is Included in CPI?
The CPI measure covers more than 200 different categories of goods and services that can be combined into 8 unique groups:
- Food And Beverages
- Housing
- Apparel
- Transportation
- Medical Care
- Recreation
- Education and Communication
- Other Goods and Services
In addition to these groups, CPI also captures taxes and other government-related fees. The groups listed above contain a lot of products, and all products have a different change in price. For example, the change in the price of oil may be different from the change in the price of carrots over the same time period. This means that the actual cost of living of an individual may vary from CPI depending on what the person purchases.
Over the year 2021, the annual inflation rate spiked to 7%, but the actual cost of living increased by much more than 7% for many people. Many day-to-day household items have seen a higher than the 7% inflation rate. Some of the items that have risen the most in prices during 2021 are as follows:
- Car and Truck Rental (+87.7%)
- Used Cars and Trucks (+45.2%)
- Gasoline (+45.1%)
- Fuel Oil (+44.5%)
- Washers and Dryers (+29.4%)
- Airline Fares (+24.6%)
- Propane, Kerosene, and Firewood (+17.7%)
- Moving and Storage (+17.3%)
- Hotels and Motels (+16.9%)
- Women’s Dresses (+15.8%)
Even though some items from the list above are not used by everyone daily, many items in categories such as housing, food, and healthcare have risen more than 7%. For example, housing prices increased by around 19% during 2021 making homeownership much less affordable. Day-to-day items such as bacon, milk, and fruits have also seen a steep increase. Prices for bacon have increased by 8.4% while prices of whole milk and citrus fruits increased by 7.5% and 8.7% respectively. Many other day-to-day items not listed have also seen a significant increase in prices, which drives the cost of living higher.
How Did CPI Change Over Time?
The CPI in the United States has been steadily increasing at around 2% annually most of the time. A 2% annual inflation may not seem large, but over time it may severely decrease the purchasing power of the US dollar. For example, a 2% inflation rate will lead to an increase in CPI of almost 22% over 10 years. At the same time, the same inflation rate will lead to an increase in CPI of around 724% over 100 years. Compounding inflation provides an exponential increase in the cost of living, so even a low inflation rate will be noticeable over time.
For the same reason, money today is worth more than money in the future. When inflation is positive, it decreases the purchasing power of money. Since inflation tends to be positive, money constantly lose its purchasing power. The higher the inflation, the more value money lose. Because of that, a consumer could buy the same amount of goods 100 years ago for $100 what they could buy now for $1,300.
Cost of Living in the USA
Depending on what region is taken into consideration, the inflation and cost of living may vary greatly. For example, Dallas in Texas has seen an inflation rate of only 5% while Los Angeles in California has experienced an 8% inflation rate. Even though the cost of living in a city relative to other areas changes over time, it usually happens slowly, so a snapshot of the cost of living over different areas may provide a good insight into what regions may stay expensive for some time. The following list provides the top 5 states with the highest and lowest costs of living in 2022. The values in brackets refer to the cost of the living index where 100 reflects the national average.
Top 5 States in the USA With Highest Cost of Living in 2022:
- Hawaii (193.3)
- District of Columbia (158.1)
- New York (148.2)
- California (142.2)
- Massachusetts (135)
Top 5 States in the USA With Lowest Cost of Living in 2022:
- Mississippi (83.3)
- Kansas (86.5)
- Oklahoma (87.9)
- Alabama (87.9)
- Georgia (88.8)
There are many factors that may affect the inflation and cost of living in different areas. These factors may include infrastructure development, population increase, wages, etc. These factors may persist, or they may pass relieving the inflationary pressure. Because of them, the cost of living in some states may increase dramatically over a short period of time.
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