Cost of living

The aim with the project and the presentation of Cost of living in a crisis is to investigate the possibility of measuring how inflation affect living standards. The project focuses specifically on the Nordic countries and the addition of “in a crisis” to the concept of “cost of living” sets the project in the context of the post-covid and crisis affected times we are living in.

With the use of existing collections of data on hypothetical household incomes, the working group created a counterfactual analysis of the development of consumer price indices, to show the measured effect on loss of disposable income for Nordic households as the costs of living in crisis. The Nososco editorial group provided information on legal measures targeting the increased costs of living across the Nordic countries, and thereby provided information on the similarities in the measures taken by governments when acting on the effects of inflations.

We measure inflation as changes in consumer prices. If we want to measure the effect of inflation on cost of living, we first must accept that disposable income is a suitable measure for means by which people can cover their costs of living. Secondly, we must identify the effect of inflation as the difference between actual disposable income and a counterfactual disposable income.

The counterfactual disposable income is established as the continued rate of inflation into a parallel point in time where we would measure the actual disposable income. This is the main point of this project, when we focus on a situation of crisis, where the counterfactual situation would be in fact any alternative situation other than what is in accordance with fact. However, in this project the counterfactual situation is limited to the continued rate of inflation. 

For the presentation of the analysis an investigation of the policy responses was made by the Nososco editorial group. This was based on the implemented legislation targeting the actual effects of inflation in the period of crisis.

The outcome of the analysis and comparison of policy initiatives targeting the effects of inflation demonstrated new insights of a close relationship between needs and policy changes across the Nordic countries, and that this form of analysis allows for meaningful comparison of how a situation of crisis is handled by the Nordic countries.

Using counterfactual analysis make for the possibility of attribution of cause and effect between interventions and outcomes. If we consider a cause as something that makes a difference, then the difference must be of such a magnitude that there is a difference as to what would have happened without its occurrence. And if this cause had been absent then the effects, or at least some of them, would also have been absent. This can be summarized so as: The meaning of causal claims can be explained in terms of counterfactual conditionals of the form: If A had not occurred, B would not have occurred.

If the situation that gave the changes in inflation is ascribed to the crisis in Europe, then according to this theorizing of counterfactual analysis, the effect of increased inflation would not have occurred had the crisis of war in parts of Europe not been the case. In other words, If there was no crisis, we would not have had inflation.

In the analysis a counterfactual CPI is calculated using the expected linear trend of the CPI based on previous years development. The monthly development of CPI from 2025-2021 is used in this calculation. At first it was investigated if there were any substantial effect of the Covid-pandemic on the development in the total CPI. And though there are observed a reduction during 2020, it has not been eliminated from the trendline analysis.

When a counterfactual CPI is calculated for a country for the total CPI, the established formula is extended into the period of analysis. In this case the year of 2022, but this could also be extended into 2023. The outcome is an estimated development of total CPI. Based on the 12 monthly values of the counterfactual CPI and the similar values for the actual CPI, an average of real CPI and counterfactual CPI is calculated. Both averages are then used to calculate an index value which we name the extra burden (ExB) indicator:

              ExB = Real CPI / Predicted CPI

The value of the ExB indicator is 1 if both real CPI and predicted CPI is equal. The value is below 1 if the trendline of the predicted CPI point in a direction of lowering the consumption on goods e.g., the case with communication. The ExB indicator is higher than 1 if the real CPI is above the predicted CPI, and the higher the value of ExB the higher the cost in the real situation compared to the counterfactual situation. The ExB is calculated for each of the Nordic countries in the analysis, and it is possible to compare the relative effect of the indicator across the countries, thereby demonstrating if some countries can be said to be hit harder by inflation than others.

Besides the total CPI extra burden indicators are calculated for other essential consumer areas such as electricity, food, rent etc. This is described below.

The value of the ExB indicator from total CPI is then used for recalculating the size of the disposable income after rent in the counterfactual situation, which thereafter can be compared against the real disposable income after rent, producing the estimated loss of disposable income due to inflation.

When choosing data for this analysis comparability is of importance. Two different types of data are used. 

Consumer price index

First and foremost, the analysis use data on consumer price indices (CPI) as they are published by the Nordic statistical bureaus. It is expected that the CPI is calculated as indices measuring changes in prices as experienced by consumers, that is the average change in price over time of a basket of consumer goods and services. The method is described by the International Labour Organization (ILO) here.

All the Nordic statistical bureaus except Statistics Faroe Islands produce CPI on monthly basis, providing the option of monitoring the development in inflation and prices during the year. This gives the best available opportunity to predict the counterfactual situation and compare it to the actual situation. Data on CPI from Faroe Islands are available quarterly, and the changes from on point of measure to the next have been interpolated in this analysis.

The inflation rate is calculated as the difference in CPI’s in two consecutive periods of the same type, which in this case in monthly.

Both data on total consumption, but also data on selected essential areas is included in the project. Essential areas selected are mainly electricity etc. (04.5), food (01.1), rental cost (04.1), and health (06), services for transport (07.3) and communication (08). Health, transport services and communication are included as essentials for the analysis as they identify important areas of consumption in daily life. Furthermore, communication and transport are areas not directly affected by the crisis per se.

To alleviate the use of the disposable income into areas of consumption, statistical data on consumption by purposes was collected from national statistical agencies and Eurostat. There are cases where these data are some years old, but it is estimated to identify the level of disposable income spent on the selected elements in the project mentioned above. 

These data are averages and therefore cannot identify if some areas of consumption are excluded by consumers daily if the disposable income do not suffice.

Using data on consumption price indices and consumer purpose cannot identify the element of choosing between consumption if the disposable income is low. In general, the CPI only measure the change in income needed to maintain same standard of living. It cannot be used for identification of substituting between quality of goods for consumption, which is only reasonable to expect when people and households experience changes (reduction) of disposable income. 

Calculation of “Life situations” 

The other set of data used in this project come from the Nososco group for Social benefits. The working group have defined the data for calculating changes in life situations across the Nordic countries, and thereby established a point of measurement that is directly comparable between the countries. 

The calculations made and their main purpose is described in detail in the entire section named “Life situations” on the webpage and illustrated with data in the database or in the Nososco Hypothetical Household tool (NoHH).

The base data for the calculations of compensation rates, which are the main purpose and outcome of the work done by this group, is data on income from work. This cover selected levels of income from work, benefits, taxation, social security contributions for different sizes of households. 

The calculated size of disposable income, which is relevant for this project, is therefore hypothetical is that sense, it comprises of relevant examples of income for different types of Nordic households. The levels of income are comparable on their own because they are measured using a definition of average wage from private employment.

For this specific project and presentation working group initially selected a few household types with only one level of income for comparisons. This sub selection of available data was merely to reduce the level of detail in the presentation to households with low income. The project therefore focused on households of singles with 1 child, singles without children and couples with two children. The level of income was set to AW 75 and AW50 + AW 75 respectively. It is possible to read more about the applied methods for calculation on life situations on this page under the section Life situations.

The six graphs below show the development of the consumer price index (CPI) in the Nordic countries from 2015 to 2022. Each graph also includes the predicted counterfactual CPI for the same period.

Data from 2015 to 2021 is used for predicting the CPI for 2022 as the counterfactual CPI. It is noticeable that the development on CPI in each of the countries shows a slight reduction in CPI for the year of 2020, and illustrates the effect of another period of crisis.

The counterfactual CPI is calculated using yearly averages in the original presentation. Later a dataset with monthly CPI data have been used for reproducing the analysis with a similar outcome.

Using the yearly average of real CPI divided with the predicted CPI the estimated extra burden on Nordic households is calculated by the formula mentioned above: ExB = Real CPI / Predicted CPI.

This results in the extra burden indicator (EXB) which is used for interpretation of the effects of changes in CPI compared to the counterfactual situation. If the outcome of the ExB indicator is exactly 1, then there is no estimated difference between the real and the counterfactual situation.

In the table below the ExB indicator is presented for four different CPI’s: Total CPI and three essential areas such as energy etc. (04.5), food (01.1) and rental (04.1).

Data in the table is rounded to 1 decimal, and it makes it easier to read which of the indicators are expected to influence the estimation of disposable income and costs of living. For all countries there is a general effect on the Total CPI, though not as high for Norway as for the other countries. All countries, and especially Denmark demonstrate a high effect on consumption of energy etc. with Finland, Faroe Islands and Sweden following. There is also an effect on the consumption of food, and only very little effect on rental costs.

Using the ExB indicator for total consumption it is possible to estimate the differences between the actual disposable income and the counterfactual disposable income. 

As explained above calculation of the disposable income for selected households with different income levels are carried out by the Nososco group for social benefits. These comparable data are subsequently recalculated using the ExB indicator with the goal of demonstrating the differences between disposable income in the real and counterfactual situation. 

The graph below illustrates these differences in Denmark when measured for three different households at similar income levels. The disposable income is after rent for SW1C (Singles with 1 child), SWNC (Singles without children) and CW2C (Couples with two children) all living in rental accommodation and having an income of 75 per cent of the average wage from employment, with couple having the combined income of 50 per cent and 75 per cent of average wage.

The Danish data is presented here as an example. The similar data from other Nordic countries are found in the presentation of “Cost of living in a crisis” on pages 11-16, available in the section Special publications.

In the analysis of cost of living, it is estimated how much is lost in value of consumption for households at selected income levels. The estimated loss of consumption is based on the effect of the ExB indicator calculated for each of the four consumer price indices. Total, energy etc, food and rental.

This is calculated based on the disposable income after rent, as shown in the example in the graph above. Furthermore, the figures are made comparable using the purchasing power parity pr. euro indicator available at Eurostat (PPP/Euro) creating purchasing power standards (PPS). This is to compare the value needed for buying specific types of goods across the countries instead of comparing national currencies. The differences in value between the euro used in Finland and the Icelandic Krona is simply too high to make for good comparison. In the presentations mentioned above, it is possible to see the estimated levels in national currencies for each country.

In the three graphs below the estimated loss of consumption is presented for three different households at a similar level of income.

Except for the scale and size of values, there are not notably differences between the three graphs. This is because there is made no supplementary assumption of differences in preferences when cost increase on specific goods. Available data on average use of disposable income for different types of goods are used in the calculation, but this data does not include differences in households or income levels. However interesting, this would require another type of analysis.

It is however interesting that data show a quite high loss of consumption on rent in the Faroe Islands. This has probably nothing to do with the crisis in Europe, but probably more to the effect on locally high costs on the housing markets. Similar, the estimated data for Finland demonstrate that there could be the opposite of a loss. This could illustrate a possible flaw in the prediction of the CPI for rent in the counterfactual situation or in fact a decrease in rent in Finland. This has not been investigated further.

The Nososco editorial group was asked to contribute to this analysis with information about relevant policy initiatives and legislation implemented in the period from June 2022 until May 2023, right up till the presentation of the analysis at the Nordic Welfare Forum in Reykjavík. An overview of the different initiatives and legislations are found in the presentation mentioned above.

What is observed from the policy initiatives and legislation across the Nordic countries is a focus on common target groups consisting of families with children, households with low income, students and pensioners including also people with disabilities. In short groups of individuals that can be in a vulnerable economic situation and where cost of living is a concern for the individual or household.

What is more different across the Nordic countries is how initiatives have been implemented. To sum up, three different forms of initiatives to counter the effects of inflation are in the form of one-off payments to specific target groups, or as some form of recurring change in cash benefits for various recipients. But in some of the Nordic countries the initiatives have also been focusing on reduction of taxation and tariffs on fuel for heating and electricity.

In this analysis, different methods and data has been used for estimating how inflation effect cost of living for households and individuals in the Nordic countries. It is observed that regular available data on consumer prices can provide a basis for predicting a counterfactual situation and thereby give the extra burden indicator for estimating costs of living. Yearly produced comparable data on disposable income, as part of the calculations done by the Nososco group for social benefits, provide the ground for comparing the effects of cost of living across the Nordic countries. This analysis therefore opens for new routes of using these data for comparisons.

As already mentioned in the text, a further analysis on more detailed data on consumer price indices have been made after the presentation, with the intention of evaluating the method of calculation and add to the level of essential areas of consumption to the analysis. With the analysis redone, a further initiative of creating a process of recurring calculation of data for this analysis is set in motion by the Nososco group for social benefits. It is therefore planned to have an online toll for presenting these data before the end of 2024. 

This tool is expected to provide all the material created for the analysis presented here, and furthermore extend the data for analysis into all other data areas made by the working group, and have data for analysis of consecutive year, including 2022 and 2023.