Folks often-times confuse inflation with cost-of-living. Inflation is the general rise in prices caused by too much money chasing too few goods and services. Cost-of-Living is related to geographic differences in the purchasing power of the dollar–created by real effects such as productivity or amenities.
Sometimes the two can interact since easy money can filter in the economy in uneven ways which can result in rising cost-of-living in one area, at least temporarily. For instance, federal expansion funded by the printing press would, in the short-term, drive up the cost-of-living in Washington D.C. relative to the rest of the country. Yet, as this money worked its way through the national economy, general inflation would ensue.
Overall, I believe cost-of-living is one of, if not the, most over-looked public policy issue. Its effects are far reaching, especially as we’ve moved to a highly centralized form of government where one-size-fits-all policy is the norm. Future posts will highlight some of these distortions.
But first, lets talk data . . . there is not much of it when it comes to cost-of-living. The oldest running data-set comes from the ACCRA cost-of-living index. Many years ago, “ACCRA” was the research arm of the U.S. Chamber of Commerce. Now they are known as C2ER, “The Council for Community and Economic Research.” They are a great organization and up until a few months ago, I was on their Board of Directors until my 3-year term expired.
To see the practical reality of cost-of-living, check out the data in action at bankrate.com’s COLI calculator powered by the ACCRA cost-of-living index. They sell access to this calculator so if your organization could use this data please contact them to get a license.
Additionally, the U.S. Department of Commerce’s Bureau of Economic Analysis is also looking to get into the cost-of-living game. For the past several years, their researchers have been trying to quantify cost-of-living using readily available data from other BEA projects. This article summarizes their latest efforts. Keep in mind that this is experimental and I don’t expect BEA will come up with the resources anytime soon to begin publishing their cost-of-living index on a regular basis.
There is too much about cost-of-living to put into one post so this to will become a regular series here at Wealth Alchemy . . . stay tuned for more analysis and updates using the most recent data.