How to Use the Consumer Price Index for Escalation
The Consumer Price Index (CPI) measures the average change in
the prices paid for a market basket of goods and services.
These items are purchased for consumption by the two
groups covered by the index: All Urban Consumers (CPI-U) and
Urban Wage Earners and Clerical Workers, (CPI-W).
Escalation agreements often use the CPIthe most widely
used measure of price changeto adjust payments for changes
in prices. The most frequently used escalation applications are
in private sector collective bargaining agreements, rental
contracts, insurance policies with automatic inflation
protection, and alimony and child support payments.
The following are general guidelines to consider when
developing an escalation agreement using the CPI:
DEFINE clearly the base payment (rent, wage rate, alimony,
child support, or other value) that is subject to escalation.
IDENTIFY precisely which CPI index series will be used to
escalate the base payment. This should include: The population
coverage (CPI-U or CPI-W), area coverage (U.S. City Average, West
Region, Chicago, etc.), series title (all items, rent of primary
residence, etc.), and index base period (1982-84=100).
SPECIFY a reference period from which changes in the CPI will
be measured. This is usually a single month (the CPI does not
correspond to a specific day or week of the month) or an annual
average. There is about a 2-week lag from the reference month to
the date on which the index is released (e.g., the CPI for May is
released in mid-June). The CPI's for most metropolitan areas are
not published as frequently as are the data for the U.S. City
Average and the 4 regions. Indexes for the U.S. City Average, the
4 regions, 3 city-size classes, 10 region-by-size classes, and 3
major metropolitan areas (Chicago, Los Angeles, and New York) are
published monthly. Indexes for the remaining 23 published
metropolitan areas are available only on a bimonthly or
semiannual basis. Contact the BLS address at the end of this fact
sheet for information on the frequency of publication for the 26
STATE the frequency of adjustment. Adjustments are usually
made at fixed time intervals, such as quarterly, semiannually,
or, most often, annually.
DETERMINE the formula for the adjustment calculation. Usually
the change in payments is directly proportional to the percent
change in the CPI index between two specified time periods.
Consider whether to make an allowance for a "cap" that
places an upper limit to the increase in wages, rents, etc., or a
"floor" that promises a minimum increase regardless of
the percent change (up or down) in the CPI.
PROVIDE a built-in method for handling situations that may
arise because of major CPI revisions or changes in the CPI index
base period. The Bureau always provides timely notification of
upcoming revisions or changes in the index base.
The CPI and escalation: Some points to consider
The CPI is calculated for two population groups: All Urban
Consumers (CPI-U) and Urban Wage Earners and Clerical Workers
(CPI-W). The CPI-U represents about 87 percent of the total U.S.
population and is based on the expenditures of all
families living in urban areas. The CPI-W is a subset of the
CPI-U and is based on the expenditures of families living in
urban areas who meet additional requirements related to
employment: more than one-half of the family's income has to be
earned from clerical or hourly-wage occupations. The CPI-W
represents about 32 percent of the total U.S. population.
There can be small differences in movement of the two indexes
over short periods of time because differences in the spending
habits of the two population groups result in slightly different
weighting. The long-term movements in the indexes are similar.
CPI-U and CPI-W indexes are calculated using measurement of price
changes for goods and services with the same specifications and
from the same retail outlets. The CPI-W is used for escalation
primarily in blue-collar cost-of-living adjustments (COLA's).
Because the CPI-U population coverage is more comprehensive, it
is used in most other escalation agreements.
The 26 metropolitan areas for which BLS publishes separate
index series are by-products of the U.S. City Average index.
Metropolitan area indexes have a relatively small sample size
and, therefore, are subject to substantially larger sampling
errors. Metropolitan area and other sub-components of the
national indexes (regions, size-classes) often exhibit greater
volatility than the national index. BLS strongly recommends that
users adopt the U.S. City Average CPI for use in escalator
The U.S. City Average CPI's are published on a seasonally
adjusted basis as well as on an unadjusted basis. The purpose of
seasonal adjustment is to remove the estimated effect of price
changes that normally occur at the same time and in about the
same magnitude every year (e.g., price movements due to the
change in weather patterns, model change-overs, holidays,
end-of-season sales, etc.). The primary use of seasonally
adjusted data is for current economic analysis. In addition, the
factors that are used to seasonally adjust the data are updated
annually. Also, seasonally adjusted data that have been published
earlier are subject to revision for up to 5 years after their
original release. For these reasons, the use of seasonally
adjusted data in escalation agreements is inappropriate.
Escalation agreements using the CPI usually involve changing
the base payment by the percent change in the level of the CPI
between the reference period and a subsequent time period. This
is calculated by first determining the index point change between
the two periods and then the percent change. The following
example illustrates the computation of percent change:
|CPI for current period
|Less CPI for previous period
index point change
|Divided by previous period CPI
|Result multiplied by 100
||0.047 x 100
The Bureau of Labor Statistics neither encourages nor
discourages the use of price adjustment measures in contractual
agreements. Also, while BLS can provide technical and statistical
assistance to parties developing escalation agreements, we can
neither develop specific wording for contracts nor mediate legal
or interpretive disputes which might arise between the parties to
For any additional information about the CPI, please call (202)
691-7000, or write to:
Bureau of Labor Statistics
Office of Prices and Living Conditions
2 Massachusetts Avenue, NE., Room 3615
Washington, DC 20212-0001
Last Modified Date: October 16, 2001