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Consumer Price Index: What you need to know

The CPI is a measure of the change in the cost of living between two periods in time. 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.
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The CPI-W is the older index. It covers only urban wage earners and clerical workers and represents about 32 percent of the U.S. population. The CPI-U is the newer, broader index. It began in 1978 and represents the buying habits of about 80 percent of the U.S. population. It includes wage earners; clerical workers; professional, managerial, and technical workers; the self-employed; short-term workers; the unemployed; retirees; and others not in the labor force.
Many employers monitor the CPI closely because wages tend to follow changes in the cost of living. As goods become more expensive, workers require additional income to pay for them. Conversely, if prices remain relatively stable or begin to fall off, wage increases are seen less as a necessity and more as a luxury. Most large companies are constantly alert to changes in the CPI and base major decisions about compensation rates on these figures more than any other. Multiyear collective bargaining agreements often refer to wage “indexing,” a direct reference to the CPI. If an employer wants to keep pay levels and rate changes up-to-date and remain competitive in its industry, increasing them by the amount of the increase in the CPI is a sound and widely used practice.
Cost of living adjustments (COLA). ...

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