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Cost-of-Living Adjustment (COLA)
       
 
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Cost-of-Living Adjustment (COLA)

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Cost-of-Living Adjustment (COLA)
Adjustment of wages designed to Offset changes in the cost of living, usually as measured by the Consumer Price Index.
    
COLAs are key bargaining issues in labor contracts and are politically sensitive elements of social Security payments and federal pension because they affect million of people. Cost of living is the cost of maintaining a certain standard of living. A cost-of-living index is a price index that measures relative cost of living over time. Such indexes are constructed to have a value of 100 in a given year (or period or place), called the base. An index value of 110 means that the current cost of living is ten percent higher than in the base year. Because the index provides measure of the change in the cost of living, it has no units.
    
There are many different methodologies that have been developed to calculate cost-of-living indexes, including methods that allow for substitution among items as relative prices change.
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