All of the standard metrics, including job numbers, unemployment, GDP, the stock market, and cooling inflation, indicate that our economy is moving in the right direction and at a much faster clip than any experts had previously predicted.

In fact, a few short years ago, economists were almost unanimously predicting a severe economic crash as both impending and unavoidable. Thankfully, they were wrong.

However, most Americans are still experiencing a tightness in their wallets and bank accounts that has not been common since the Great Recession of 2007 to 2009. A steep rise in the cost of living, which has far outpaced wage growth, is to blame, but what exactly is the cost of living? Many have heard the term thrown around in the media or conversation, but it is a topic that deserves deeper exploration.

What Determines Cost of Living

Cost of living (COL) is the amount of money necessary to cover basic expenses such as housing, taxes, food, transportation, and healthcare within a particular area and time frame. COL can then be used to summarize how expensive it might be to live in a specific state or city.

Two of the biggest contributors to the present spike in COL are rent and food costs. Rent, across the nation, has increased by over 6% in the past 18 months. In 2023, in some cities, rent increased by over 30% in a single year!

Food costs saw a massive jump of about 11% from 2021 to 2022 and continue to rise even now. Inflation, supply chain disruptions, and increased business costs have all contributed to this spike. At present, the average annual cost for food ranges from around $3600 to $6000.

The Counterweight of Wages

Wages also play a huge role in understanding the squeeze many Americans currently feel when it comes to paying bills. Wages and salaries saw a 4.3% increase from March 2023 to March 2024. However, this increase in income has to be compared against the rising cost of living.

One way this is conceptualized is by subtracting the annual COL from the average annual salary of a given area. What is left over would be the typical disposable income of the average resident living there. Of course, every person’s situation is unique and this approach represents only an approximation of a hypothetical experience.

For reference, at the time of writing, the average income in Alabama is $50,620 annually. The Bureau of Economic Analysis currently lists the average cost of living in Alabama to be around $39,657 per year per individual. This would mean the “average” Alabamian has about $10,963 in disposable income each year to spend on entertainment, gifts, savings, and other discretionary purchases. For perspective, that is equivalent to $210.82 per week.

Comparing Apples to Apples

While it may be factually true that Hawaii has the highest cost of living and Mississippi has the lowest, the latter also has the lowest average income of all states, at just $45,180 annually. This means that residents in both states are likely to have very little disposable income after covering their essentials.

No two states and no two cities are exactly alike. The cost of living in Huntsville, Alabama is 5.25% less than the cost of living in Grand Rapids, Michigan, for example.

If you are planning to relocate, Bankrate offers a very useful tool online that allows you to calculate the annual income you will need to earn in your new hometown in order to enjoy a similar lifestyle to your current salary and location.

Conclusion

While the economy is rebounding in a fantastic way, many Americans are still feeling an economic strain due to sharp increases in living costs. Wage growth has been solid, but has not been able to keep up with inflation, particularly when considering the massive jump in food and rent costs.

Understanding how COL varies from place to place can be helpful when considering relocating for a new job. A modest pay cut when moving to a more affordable area may ultimately be worthwhile, but a significant pay increase may be necessary if relocating to a more expensive state or city.

Americans have every reason to feel optimistic about the current economy and where it’s heading, but understanding what is driving inflation helps to explain the crunch many of us are feeling in our pocketbooks.