How do I use the Consumer Price Index (CPI) for escalating contracts?
The 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 CPI the most widely used measure of price change to 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.
