Looking to Benchmark Pay?
Consumer Price Index
The cost-of-living is measured by a U.S. Bureau of Labor Statistics (BLS) index called the Consumer Price Index (CPI). This index measures changes (over time) in the prices of a constant bundle of goods and services called a market basket.
Q: How do you get a market basket?
A: A market basket contains a number of the most commonly bought food and household items. The variation in the price of the items on the list from month to month gives an indication of the overall price trends.
CPI history. The Bureau of Labor Statistics (BLS) has been publishing the Consumer Price Index since 1921. The CPI was developed to measure the cost of living for urban families. As such, it became the basis of escalator clauses in union contracts.
CPI function. Like any general index, the CPI is an abstraction that rarely corresponds with the actual living-cost changes for any given family.
Consumption patterns among family units differ as a result of differences in family:
- age
- tastes
- composition
- income
CPI varies greatly in its ability to measure cost-of-living changes for various groups. Moreover, consumption patterns and product quality change over time.
At present, the BLS publishes 2 indexes:
- CPI-U. The CPI-U measures the cost of living for all urban consumers.
- CPI-W. The CPI-W is the traditional index measuring some groups of urban wage earners and clerical workers.
To obtain information on the CPI, see the Bureau of Labor Statistics article Beyond the Numbers.
Problem solving. The BLS has made changes to improve the index over time and to meet specific problems.
Here's an example…
The change involved substituting a rent equivalent for home ownership at a time when high interest rates had skewed upward the cost of home ownership.
Obviously, such technical problems mean that tying salary levels to the CPI varies in fairness to different groups.
In unions and perhaps in most organizations, fairness seems to suggest the same cost-of-living adjustment for everyone. But a compressed salary structure resulting from flat cost-of-living increases may produce difficulties in recruiting and keeping top management and high-performing employees.
For more information on integrating cost-of-living information when setting pay, please see DLC Course 78: Salary Increase Planning.
Memory Jogger
Tying salary levels to the CPI: