Comparing Cost of Living Index with Consumer Price Index (CPI) in Urban Areas

The main objective of this paper is to compare consumer price index (CPI) with true cost of living index (COLI) of Iran’s urban households from 1991 to 2011. In order to determine the minimum subsistence level, An Implicitly Directly Additive Demand System (AIDADS) was estimated using GAMS and Minos5. Then with help of those estimations, the Engle coefficients for a linear expenditure system were estimated using the seemingly unrelated regressions (SUR) econometric technique for 12 commodity groups. Using the results of previous estimates, welfare measures and true cost of living index were calculated and compared with the prices of the base year (2004=100). The results indicate that during the period of study, the consumer price index (CPI) is a skewed estimate of the cost of living index and, with the exception of 2008, underestimates it for the period between 2005 and 2011 while overestimating it for rest of the period. In other words, for the period between 1991 and 2003, it displays an upward bias while for the others, it is downward. Results also show that the cost of living indices for expenditure deciles are significantly different from the CPI in urban areas.