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Inflation as a measurement is a kind of national economic puree. Local cost of living is a much more relevant number to employees lives. Is there a proper way for an employer to quantify how cost of living changes in an area year to year, for the purposes of indexing raises? Some sort of standard table or publication?

  • Depends on your country there are standardised measures for example RPI, CPI CPI+H and so on. – Pepone Dec 29 '15 at 21:32
  • Where would you find a local cost of living statistic? Chances are the same place could well have COLA numbers too. – JB King Dec 29 '15 at 23:12
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Not really. 'Localised' inflation rates are very hard to find. Published inflation figures are ultimately just an estimate and, as you say, they are aggregated. It's not cheap to get the data, and to do the same in every 'locality' would be very expensive.

Some guidance is better than nothing. If you have no better index than national inflation figures, use them. Unless you have strong evidence that your employees in your locality are dealing with a very different economic situation than the national average, just sticking with the national figure is probably your best bet. Remember the only reason national figures might not be good enough is not that the cost of living in your area is higher or lower than the average, but that the cost of living in your area has changed substantially more (or less) than the national average in the past year.

Pick the right index. Use an index which represents the costs employees face, not some other measure. In the UK, the Retail Price Index (RPI) is a good measure of how prices change for households. Although the government has been using the Consumer Price Index (CPI) as the 'headline' inflation figure (markets often look at this as it is more comparable internationally), this leaves out housing costs and is more likely to reflect the spending habits of tourists than of employees. In the US, the CPI-U seems to be the most representative national figure available.

Pick a time of year and stick with it. If your pay round is for the calendar year, you probably want September or October's 12-month inflation figures. Keep using the same figure each year and be transparent about it. Consider what happens in a deflationary year. If, as a business, you historically have decided not to (or hypothetically wouldn't in the future) giving inflation-linked increases if you had a 'bad year', then unless you have a way of making up for this in a 'good year', this will cause resentment.

If there's anything substantially different, chances are, you'll see it in the housing market. Housing accounts for a large part of most people's spending, and if that's massively out of kilter with the national picture, you might consider making an adjustment. Look for organisations that keep tabs on the whole market, with a history of indexes going back several years. In the UK, Nationwide have an index. Remember that renting and buying are different markets, though they do affect each other considerably, and that the more 'local' you get, the more you need to remember that price changes don't tell the whole story.

Don't double-count if you do decide to 'adjust'. For example, if you realise property prices in your area have shot up and you need to account for this, you need need to look at how much of an increase that's going to make up, and how much of people's spending that should account for, and then reweight the 'basket of goods' used in the inflation calculation. This is easy to get wrong, or to produce surprising figures which 'look' wrong (but are methodologically correct) because of the volatility of local markets.

Nothing beats agreements. If your employees have a union sit down with them and talk over what's reasonable, then draw up an agreement. Union reps will typically be elected by their members to negotiate annual 'cost-of-living' increases. Unlike price indexes, negotiations with unions are sensitive both to local costs and incentives, and to the the state of the business and the industry (union reps don't have any interest in the business losing out because it can't retain staff / can't afford to pay staff, they'd be out of a job, same as you). If you don't have a union, feel free to consult, but the decision is ultimately the company's alone.

Finally, keep cost of living separate as possible. You're already doing the right thing by separating out the question of cost of living and performance. Many companies lump the two things together and those not 'meeting expectations' just don't get a raise - but this doesn't really address the problem. If inflation is higher or lower than usual this creates odd motivational effects/signals if you're not clear that there's two components. Make sure that you're actively managing performance throughout the year, and that there's no doubt in people's minds where you think they stand on performance before the pay round. In addition, 'market adjustments' for specific skillsets are a third layer employers sometimes use where there's difficulty hiring staff. Typically, these are reviewed annually and apply to all staff in particular hard-to-fill jobs, and aren't necessarily affected by cost-of-living etc.

In short:

  • Prioritise consistency and communication - the point is to ensure your employees will trust that the company is committed long-term to a relationship that's financially sustainable for them as well as you.
  • Trying to get local figures is either impossible or probably more trouble than it's worth; if you really think local inflation data might be worth it, check your methods carefully (preferably with someone with a statistical background).
  • @Frisbee, indeed: house price isn't indicative where it's unconnected to rent, but I'd assert they're closely linked in most places with jobs. Rent data is often harder to come by than house price data. Increase in house price is only a benefit to employees who are already owners. Yes, I could give you examples of unions agreeing different pay for different locations, but that misses the point. You talk to the union because establishing agreement on what's 'fair' is important for building trust - and also because if you do have a union, your agreement may specify their involvement anyway. – user52889 Dec 30 '15 at 0:10
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To answer your question, I would use the data from sources like Expatistan.com to compare cost of living and notice trends for a city. For example, you can see what certain things cost for individuals as recent as 12/2015. https://www.expatistan.com/cost-of-living/sacramento

However, I will agree Frisbee. Don't base raises on cost of living. Base it on attracting and retaining talent at your company.

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No, quality of life is much more relevant to employee lives.

Better schools are going to have a higher cost of living and some people are going to accept that higher cost of living. Near a beach is going to have a higher cost of living and some people are going to accept that higher cost of living.

A desolate area with no positive features may have a very low cost of living but you still may need to pay a premium to attract people.

You need to base it on what it takes to attract talent to that location.

Use local cost of living to compare what you are paying in different regions.

When I got out of college in high demand degree with several offers my lowest offer was San Francisco and it had the highest cost of living. My best offer was from the city with the lowest cost of living.

  • Cone on down vote what is the problem? A comment at least give people information. – paparazzo Dec 29 '15 at 22:22
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    While you make interesting points, the question is about "how cost of living changes in an area year to year" to "index raises". The answer was about absolute value of cost of living and attracting (rather than retaining) staff. As it stands, it doesn't help the OP (who appears to be looking for sources of hard data) or others in the same situation, where 'price to market' is impractical, meaningless, or otherwise unhelpful. – user52889 Dec 29 '15 at 22:44
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    This has nothing to do with the question, which is about raises and cost-of-living changes over time in a given area. – Andrew Medico Dec 29 '15 at 22:45
  • @user52889 But it does address how properly account - don't. If land value went up or schools got better there is not reason to index - it is built in. You rarely get shifts in local cost without a reason to support it. There a as likely to be reasons to justify the change as not. Where inflation is universal. Still I appreciate you feedback. – paparazzo Dec 29 '15 at 22:51
  • @AndrewMedico Nothing? Not if the local cost of living changes are accompanied with value which is more likely than not. But I appreciate the feedback. – paparazzo Dec 29 '15 at 23:07

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