Cost of Living Index Number is constructed to study the effect of changes in the price of goods and services of consumers for a current period as compared with the base period. The change in the cost of living index number between any two periods means the change in income which will be necessary to maintain the same standard of living in both the periods. Therefore the cost of living index number measures the average increase in the cost to maintain the same standard of life.

Further, the consumption habits of people differ widely from class to class (rich, poor, middle class) and even with the region. The changes in the price level affect the different classes of people, consequently, the general price index numbers fail to reflect the effect of changes in their cost of living in different classes of people. Therefore, the cost of living index number measures the general price movement of the commodities consumed by different classes of people.