Cost of living is the amount of money needed to buy a standard amount of consumer goods and services. Needs of individual persons and families vary. Everyone needs food, clothing, and shelter, but wants go beyond these bare necessities. The cost of living includes the cost of transportation, reading, recreation, rent, electric power, gas, fuel, home furnishings, medical and personal care, taxes, and many other things.
When salaries and wages keep step with the prices of consumer goods and services, the worker’s buying power remains stable. When prices rise, people with fixed incomes, such as pensions, fall behind in buying power. Changes in the cost of living have many causes. For example, when spending on consumer goods rises faster than the nation’s ability to produce them, prices tend to go up. But when more goods than money are available, prices go down.
The Bureau of Labor Statistics is the fact-finding agency of the United States government in the field of labor economics. It collects and analyzes data on employment, wages, and productivity. The bureau also collects data to measure changes in the prices of consumer goods and services, and reports its findings through its publications. It publishes a Consumer Price Index that summarizes this information. In preparing the Consumer Price Index, the Bureau of Labor Statistics collects information on prices and costs from thousands of food stores, homeowners and tenants, and other sources.
A system called indexing or indexation is used to tie prices, wages, and taxes to the rate of inflation. Indexing provides for automatic increases and decreases in prices, wages, and taxes as the official cost-of-living index rises and falls. For example, many U.S. labor contracts have an escalator clause, which automatically lifts wages as the Consumer Price Index rises.
See also Consumer Price Index; Deflation; Inflation.
