Cost of living adjustment

The cost of living adjustment is a periodic update to a person’s compensation that is intended to offset a decline in purchasing power. The adjustment is usually derived from a general index of pricing changes, such as the consumer price index. A cost of living adjustment is especially necessary in higher-inflation environments and when the recipients have a fixed income. The adjustment is a common bargaining point in union negotiations, where the union wants it to protect the wages of union members. A cost of living adjustment is made to the recipients of social security payments.