This paper uses a model of optimal household residential decisions to construct a comprehensive "true" spatial cost of living index with readily available Brazilian census data. We find evidence of a decreasing or U-shaped relationship (differing with education level and region) between the cost of living and urbanization, suggesting that both market disintegration and congestion play roles in raising costs. Controlling for spatial differences in the cost of living is shown to have important consequences for the determinants of poverty and (contrary to many previous results) to increase income inequality.