Abstract
This chapter examines the sensitivity of the cost of living to some aspects of price changes and income changes that cannot be detected by Laspeyres indexes such as the CPI-U and CPI-W. Although its content is confined to positive economic analysis, the article does cast light on normative choices in welfare policy. Formation of practical strategies in the negotiation of escalator clauses in private sector wage contracts involves consideration of both normative values and positive descriptions of the real environment. The same is true of policy choices in the political arena, for instance in the determination of cost-of-living adjustments (COLAs) in pensions and transfer payments. The price and income sensitivities of the cost of living, expressed as elasticities, are used to determine the size of COLAs required to keep real incomes of recipients constant.
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