History of the Cost of Living

Americans have been complaining about the cost of living since colonial days. But it has always been a challenge to actually measure it and determine how it changes over time. It was just a century ago, in 1921, that the U.S. government started publishing a national Consumer Price Index (CPI) based on living costs in major cities.

The CPI remains the most-quoted measure of living costs today, providing a record of how costs have changed from year to year along with ample evidence for the complainers that few things are as cheap as they once were.

It is also used as a proxy for inflation in adjusting union wages, Social Security payments, income tax brackets, and other financial calculations that play a major role in Americans’ lives.

The Evolution of Cost-of-Living Measures

Soon after its creation by Congress in 1884, the Bureau of Labor Statistics (BLS) started to collect data on Americans’ cost of living. In the late 1880s, it recorded how much money 8,544 families were spending each year, along with the current retail prices for 215 commodities.

As the years went by, BLS data collection became more sophisticated in its methods and more ambitious in its scale. The results often were quoted in bargaining sessions between employers and unions. Union negotiators used it to add heft to their demands for a living wage for their members.

The Early Days of the CPI

The CPI, as we know it, got its start during World War I, when the Shipbuilding Labor Adjustment Board used BLS data to establish a fair wage scale for workers in U.S. shipyards. Their labor was considered so essential to the war effort that the government didn’t want to risk any strikes or work stoppages for higher pay.

Before long, the BLS had expanded its purview to other industries, collecting data on household spending for 12,000 families across the U.S. and the prices of more than 140 products and services.

The BLS began publishing that data in 1919 and, in 1921, introduced it in a format similar to today’s CPI. In its early years, it was referred to as the Cost-of-Living Index. In 1945, it became the Consumers’ Price Index for Moderate Income Families in Large Cities. This was soon shortened to the Consumer Price Index.

The CPI has continued to evolve with the times. Sometimes it reflects current events. For example, during World War II new car and home appliance prices were taken out of the equation since none were widely available. The weightings for car repairs and mass transit were increased.

Longer-term trends also are addressed. In the 1950s, frozen foods and television sets were added to CPI price lists. In the 1960s, the cost of living of single-person households was addressed for the first time.

The New CPI for All Urban Consumers (CPI-U)

In 1978, the BLS introduced the CPI for All Urban Consumers, or CPI-U, and renamed the existing one the CPI for Urban Wage Earners and Clerical Workers, or CPI-W. The new CPI-U was designed to better reflect the living costs of the majority of Americans.

In 2002, the BLS unveiled the Chained Consumer Price Index for All Urban Consumers, or C-CPI-U. A primary difference between it and the other CPIs is that it accounts for changes in what consumers put in their shopping baskets as prices on individual commodities rise or fall. For example, if beef becomes expensive, consumers might buy more fish or chicken, and vice versa.

The Experimental Consumer Price Index for the Elderly (CPI-E)

The BLS has developed yet another CPI, the Experimental Consumer Price Index for the Elderly (CPI-E), and published data for it back to 1982.

The index is meant to track the living costs of Americans ages 62 and older, using weightings that reflect the priorities of older consumers. For example, higher medical costs are factored in.

The BLS still labels this index as experimental because of limitations to its data.

Criticisms of the Consumer Price Index (CPI)

Many changes to the CPI have resulted from criticisms of its methods and its accuracy as a measure of inflation. Those criticisms continue to this day.

As the BLS itself concedes, the CPI is often faulted for not reflecting the experience of some population groups. Also, the list of items that consumers spend their money on can lag behind what they’re actually buying, especially as hot new products come on the market.

And, while the CPI may do a reasonably good job of capturing the experience of Americans overall, it can be way off the mark for any given individual. “Those consumers whose market baskets are different from the average basket will probably experience inflation that is different from the CPI measure,” the BLS noted in 2012. “In recent years, someone with high expenditures on gasoline and medical care experienced much higher inflation than someone who spent heavily on furniture, apparel, and electronics.”

Perhaps not surprisingly, some critics argue that the CPI tends to exaggerate inflation, while others maintain precisely the opposite.

How the Consumer Price Index (CPI) Affects You

Whatever its limitations, the CPI plays a central role in many Americans’ lives. For example, collective bargaining agreements often include cost-of-living adjustments (COLAs) derived from the CPI. Employers with nonunionized workers may consult the CPI in setting their own wage increases.

Social Security and Supplemental Security Income recipients are eligible for an increase in their benefits each year based on any rise in the CPI-W from the prior year. If the CPI-W doesn’t increase, as was the case in 2016, benefits remain unchanged.

The Social Security COLA increase for 2023 was 8.7%. The 2024 increase is 3.2%.

The CPI also affects how much income tax you pay from year to year. The Internal Revenue Service (IRS) adjusts marginal income tax brackets each year in accordance with changes in the chained CPI.

However, not every government agency uses one of the CPIs to approximate inflation. The Federal Reserve Board, for example, uses the Personal Consumption Expenditures (PCE) Price Index, an alternative measure produced by the Commerce Department’s Bureau of Economic Analysis, which it sees as more accurate for its purposes.

Consumer Prices and Household Incomes

While the CPI is a factor in determining the incomes of many Americans, it is far from the only one. Our research finds that both consumer prices and household incomes generally rise over time, but hardly in lockstep.

As the top graph below shows, the CPI tends to rise at a fairly smooth pace over time (although the inflation-wracked 1970s accelerated the curve, as the graph also makes clear).

But as the second graph shows, household incomes follow a more jagged path, even declining for periods of time, such as during recessions.

What’s more, even seemingly small annual increases in the cost of living adds up over the years, much the way that compound interest works. For example, the CPI-U rose at a relatively modest rate through the 2010s, with an annualized increase of 1.4% a year over the decade, followed by a sharp uptick that began in mid-2020 as COVID-19-related supply chain problems set in.

All the same, the BLS’ CPI Inflation Calculator shows that $100 in January 2010 had the purchasing power of $$142.04 at the end of September 2023.

Are Americans Falling Behind?

Many Americans’ personal experience suggests that wages have not kept up with the cost of living in recent decades. The data, however, are more nuanced. There's evidence, anecdotal and statistical, that most of the wage gains are flowing to the top.

If that is changing the process is moving slowly.

The latest numbers from the Bureau of Labor Statistics indicate that real average hourly earnings for all workers increased 0.5% from September 2022 to September 2023. But they worked fewer hours, indicating an actual decrease of 0.1% in the period. Non-supervisory employees had it worse. Their real average hourly earnings increased 0.8% but a shorter workweek resulted in a 0.2% decrease in real earnings.

That wages are more or less keeping up with inflation is not necessarily good news—especially in a country that has long prided itself on being a land of opportunity, where people who work hard can expect to see their standard of living improve over time. Economists refer to it as wage stagnation.

Wage growth has barely budged for Americans toward the bottom of the economic pyramid, a phenomenon now recognized as income inequality.

Workers who earn the minimum wage have been particularly disadvantaged. Some states tie their minimum wage to the CPI, while others leave it to their legislators to decide when increases are merited. The federal government takes the latter approach, and raising the minimum wage is a contentious political issue. The federal minimum wage has been $7.25 an hour since 2009.

Because the federal government has been slow to raise the minimum wage, some workers have seen a substantial decline in their inflation-adjusted incomes. In 2022, the most recently-available data, the federal minimum wage of $7.25 was worth 18% less than when it was last raised in 2009, after adjusting for the costs of living. In 1968, the average minimum wage worker earned $10.59 per hour in inflation-adjusted terms, which is 46% more than minimum-wage workers earn today. "The minimum wage today would be over $22 per hour had it tracked productivity increases over the last five decades," according to the Economic Policy Institute."

So while many Americans may complain about the cost of living, some have more to complain about than others.

The Bottom Line

The Consumer Price Index is calculated in the U.S. by the Bureau of Labor Statistics, which measures the price of a "basket" of necessary goods from month to month. Comparing the change in the index over time is a critical piece of information in evaluating the cost of living.

But determining the real cost of living entails examining income trends and inflation data as well as spending requirements. As a whole, these numbers can be used to determine whether the average American family is bringing home enough money to maintain a decent standard of living.