The difference between CPI and COLA


By Sharon McKnight, CCP SPHR

Candy-Bar_With_PenniesWhen I was a kid, a candy bar cost a nickel. Now, it’s a challenge to find one under a dollar. The cost of satisfying my sweet tooth, however, didn’t jump from five cents to nearly a hundred pennies in one giant leap. Nope, it crept up in itty-bitty steps each year, which, in a nutshell, is the CPI. COLA is when my parents bumped up my allowance regardless of whether I deserved it.

Clear as a mud puddle in March, right?

Maybe this will help …

Percent_IncreaseThe Consumer Price Index (CPI), as defined by the Bureau of Labor Statistics (BLS), is a measure of the average change over time in prices paid by urban consumers for a “market basket” of goods. For example, if an average family had to spend $50 for groceries in 1988 and $150 for those same groceries in 1998, the CPI would have tripled in 10 years. BLS measures changes in these costs from year to year and reports on them in the form of two Consumer Price Indexes, the CPI-W and the CPI-U.

The CPI-W, the older index, covers only urban wage earners and clerical workers and represents about 32 percent of the U.S. population. The CPI for Urban Consumers (CPI-U), the newer and broader index, began in 1978 and represents the buying habits of about 87 percent of the U.S. population.

Market_BasketThe CPI “market basket” is developed from detailed expenditure information provided by families and individuals on what they actually bought. This information is collected from thousands of families around the country on their spending habits each quarter. To collect information on frequently purchased items, such as food and personal care products, another set of thousands of families keep diaries listing everything they bought during a 2-week period. In general, CPI refers to CPI-U data.

Why the CPI is important to employers

Salary_IncreaseMany employers monitor the CPI closely because wages tend to follow changes in the cost of goods. Also, rather than, or in some cases in addition to, providing performance-based merit increases, some employers provide COLAs, also referred to as general increases. Some employers use the most recent annual CPI as the percent of increase for their COLA and some simply pay what they can afford. Either way, the ratio of employers offering merit increases to those offering general increases is rising. BLR’s recent surveys show that 18% more employers offered merit increases than COLAs in 2013 and that, in 2016, 46% more offered increases tied to performance.

Given many employers use the annual CPI as their COLA, it’s easy to think that CPI and COLA are the same, but they’re a bit like apples and oranges—both fruit but different varieties. For example, COLA, as calculated by many employers, uses the CPI-U but, as calculated by the government, uses CPI-W.

Social Security COLA

Social security card and American money

Legislation enacted in 1973 provides for cost-of-living adjustments, or COLAs for Social Security and Supplemental Security Income (SSI) benefits to keep pace with inflation. The first COLA was based on the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the second quarter of 1974 to the first quarter of 1975. After 1983, however, COLAs have been based on increases in the CPI-W from the third quarter of the prior year to the third quarter of the current year in which the COLA became effective.

So, what’s the difference between CPI and COLA?

Apple_and_OrangeIf looking strictly at the numbers, they are often the same, implying that there isn’t much difference but, like most things, it’s not that simple. CPI is the year-to-year change in the cost of a select market basket of goods (e.g., the rising cost of my candy bars). COLA is the year-to-year change in the amount of a Social Security benefit or an employee’s pay that is not tied to job performance (e.g., increases in this kid’s allowance).

Getting CPI & COLA data

BLS issues CPI data around the 26th of each month and the latest available CPI figures can be found in the Merit Increase Resource Center at Compensation.BLR.com. For more detailed information on CPI statistics, see the national Consumer Price Index section on the BLS website at www.bls.gov.

Specific information on how the Social Security Administration uses the CPI to determine cost-of-living adjustments can be found at www.ssa.gov/OACT/COLA/colasummary.

Advertisements

Please share your thoughts.

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s