Beyond the CPI: An augmented cost-of-living index

This note examines an augmented cost-of-living index (ACOLI) for the purpose of accounting for "augmented consumption" in real income measures. 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 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 exploratory application of the ACOLI approach to the United States during the 1960-1997 period suggests that the Consumer Price Index has grown about 19% faster than the ACOLI. This correction would reduce the estimated cost-of-living increase by .47% per year over the last 37 years.