“I can’t believe that I didn’t get a cost of living increase this year.”
“Retirement is going to be so expensive because of the rapid increase in the cost of living.”
“I remember a day when gas used to cost less than a dollar a gallon. The price of some products is exorbitant.”
Have you ever heard one of these phrases or something similar?
Several months ago, I read the book Your Money or Your Life. The authors challenged the common assumption that the cost of living is really (at least drastically) increasing. Instead, they assert that the increase in expenses has more to do with our increasing expectations. In other words, our standard of living is increasing, not the cost of living. Since I was one that commonly accepted that the cost of living increases, I thought I’d put Dominquez and Robin to the test. Do Dominquez and Robin have a valid argument? Is it just our standard of living that is increasing?
Facts Speak and Emotions Lie
Starting from an emotional framework, it certainly feels as though the cost of living increases. Some of us can remember when gas was less than a dollar. Others have memories of Coke at the corner store for a nickel. We can remember days when a gallon of milk was half the price. Times when a mechanic charged a few dollars – not a few hundred dollars. Our emotions tell us that the cost of living has increased.
Still, a recent visit with my 93 year old Grandpa reminded me that we have very different lifestyles. He lived in a day when the toilet was outside, and the family had to walk down to the spring to get water. The house was heated by a wood stove. It is clear that the Western standard of living and not just the cost of living has increased over the last 50 plus years. With some of those ‘new amenities’ have come extra expenses.
What Items Does the ‘Cost of Living’ Include?
The Bureau of Labor Statistics records that the following items make up the Consumer Price Index (CPI):
- FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
- HOUSING (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture)
- APPAREL (men’s shirts and sweaters, women’s dresses, jewelry)
- TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
- MEDICAL CARE (prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services)
- RECREATION (televisions, toys, pets and pet products, sports equipment, admissions)
- EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories)
- OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses)
Grandpa’s Standard of Living Was Very Different Than Mine
I was reflecting on some of these things when I visited my Grandfather a few months ago.
While he was raising a family, going out to eat was rare, yet included in the CPI is full service meals. Are full service meals a part of our current standard of living, or a natural outflow from an increased cost of living?
Grandpa’s memory is a little sketchy, but it was only once or twice that he flew in an airplane, but airfares are included in the CPI. Is flying a necessity to be included as a cost of living, or a luxury that belongs in the category of standard of living?
Recreation is one of those categories where it certainly seems to reflect a change in standard of living – not cost of living. Nieleson Wire reports that over half of American homes have 3 or more TVs. Back in 1975, only 11% had 3 or more TVs. Our entertainment standards have changed.
Just last week I was in a second hand store and saw a whole pile of big bulky TVs that were only $20-$30 each. Those TVs cost $100+ (when people earned a lot less) in their prime. The cost of TVs and other electronics has gone down – not up.
So it seems that in some ways the cost of living index (more accurately CPI) does reflect an increase in a standard of living, not just a cost of living.
If I purchased the same things today as in 20 years and I lived the same way, would it cost me more to live in 20 years? I tend to think that the difference in cost of living wouldn’t be as dramatic as we’ve all long since believed.
The Cost to Buy Similar Items Today Has Increased Over Time
On the other hand, as an example, my international health insurance premiums have increased 300% in the last four years. A few months ago, an older friend told me of a time when a trip in an Ambulance cost $25. Just last week, his 1/4 mile ride in the ambulance cost $800. It is impossible to just sidestep those expenses. There are certainly some categories where the cost of living has increased.
Parkinson’s Law states that “work expands so as to fill the time available for its completion” (Wikipedia). However, if we apply this thinking to finances, I think we might find that our needs expand so as to fill the income earned. Is it our appetite for more that has increased, or has the cost filling the same needs increased? Obviously, it is a little of both, but I think that our standard of living is a little more to blame than the cost of living.
If we think about the vast number of people who are tying to get out of credit card debt, it seems to remind us that our standard of living is increasing beyond our incomes. It is an insatiable desire for more, not just an increase in expenses.
Both exist – the cost of living and the standard of living, but neither is entirely to blame. However, I tend to think the standard of living increases are a larger problem than the cost of living increases.
What do you think? What is the root cause of more expensive living? Is it cost of living or our standard of living?
Photo by TruShu