Beyond the CPI: An Augmented Cost of Living Index (ACOLI)

This note examines the question of calculating an augmented cost of living index (ACOLI). The ACOLI is the appropriate deflator to apply to pretax market incomes when calculating economic well-being. Well-being includes, not only conventional consumer purchases, but also goods and services provided by employers, by mandated social regulations, and by tax-financed public goods. Because such augmented consumption is often provided in ways that raise prices but not market incomes, deflating with conventional price indexes may understate real income growth. An application of the ACOLI approach to the United States during the 1960-1994 period indicates that the conventional consumer price index has grown about 15 percent faster than the ACOLI. This correction would reduce the augmented cost of living by 0.40 percent per year over the last 35 years.