What cost-of-living numbers really tell you

"Phoenix is cheaper than Denver." "Ohio has a low cost of living." You'll see claims like these everywhere, and they're a reasonable starting point. But a single number can hide a lot, and what matters is how a place fits your own budget.

What a price index measures

The most widely used official measure is the U.S. Bureau of Economic Analysis's Regional Price Parities. They compare the price level in each state and metro area with the national average, which is set at 100. A metro area at 110 has prices about 10% above the national average; one at 92 is about 8% below.

The index is broken into categories: goods, housing, utilities and other services. That's useful, because places rarely differ evenly. A metro can have ordinary prices for groceries and services but much higher housing costs, or the reverse.

Housing is usually the biggest difference

Most of the gap between expensive and inexpensive places comes from housing. In the price parities, housing reflects rents, including what owners would pay to rent their own homes. It doesn't measure home purchase prices or property taxes.

For housing costs you can compare directly, the Census Bureau's American Community Survey publishes median rents and monthly owner costs by state and area. Remember that a median is the middle of everything, not the price of the home you'd actually want.

Metro versus state

A state average blends its big cities with small towns and rural areas. Two metro areas in the same state can differ more than two states do. When you're comparing specific places, compare metro with metro, and remember that even a metro figure covers a wide range of neighborhoods.

What the numbers leave out

Price indexes don't include taxes, health insurance premiums, or what your particular lifestyle costs. Some things that matter a lot to retirees, like cooling bills in a hot climate, home insurance in areas with storm or wildfire risk, or HOA fees, can swing a budget more than the headline index suggests.

Income counts too

For people still working, a lower cost of living often comes with lower wages. What matters is how much room you'd have after costs. For retirees whose income stays the same wherever they live, lower prices go straight to the bottom line.

A simple way to compare two places

Write down your main monthly costs: housing, utilities, groceries, transportation, health care and the things you enjoy. Then adjust each one using the category differences between the two places, and add the costs a price index misses, such as taxes and insurance. You'll end up with a far more useful comparison than any ranking.

This is general information. Price indexes are published with a lag and describe areas, not individual households.