Consumer Price Index: What It Means To Us

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Consumer Price Index: What It Means To Us

MARCH 2005 - First Step Toward Cost-Of-Living - When it comes to reporting on cost-of-living adjustments (COLA) on your pension, you've read or heard us referring to the Consumer Price Index or CPI. What is the CPI and why is it important to us?

According to Legislative Chairman Bill Hill, "You can look at the CPI as the measuring device on how the price for goods and services has either increased or decreased over a period of time (i.e., monthly, annually, etc.). Each month, a federal agency, known as the Bureau of Labor Statistics, collects and analyzes the prices of food, drugs, clothing, shelter, fuels, doctor/dentist services and other items across the country .

"From their analysis, Labor Statistics is able to calculate the CPI or how prices have changed - up or down - during that month. They report their findings by the middle of the following month.

"Typically we see that the CPI increases each month by a certain percentage. But there are exceptions to the cost-of-living increasing each month, and we've recently witnessed that very thing when Labor Statistics announced in January that the CPI had gone down during the month of December by four-tenths of a percent or, as they term it, a -0.4%.

It's important to note that Labor Statistics reports on different CPIs, including one for what they call urban consumers and another for urban workers. The one, on which we focus our attention, is the CPI for urban workers or the CPI-W.

Triggers State and Local COLAs

"We closely monitor reports on the CPI-W over a very specific 12-month cycle, which starts each October and ends the following September," comments Hill. "And here's why."

When our current COLA law (Chapter 17) was enacted in 1997, it was decided that Social Security's method for determining its annual COLA would serve as the trigger for COLAs in the Commonwealth. After Social Security has determined its COLA and the results have been reported, local retirement boards, as well as the state legislature for retired state employees and teachers, can then begin the process of determining the COLA for their retirees.

To determine how much of a COLA will be paid commencing January of each year, Social Security bases its calculations on the CPI changes that occurred during a 12-month cycle that starts every October and continues through the next September. After this cycle has been completed, Social Security then basically compares what the CPI was at the beginning to what it is when the cycle ended. If it indicates that the CPI has gone up, then Social Security will set the percent of the CPI increase as the COLA for the next calendar year.

For example, those, receiving Social Security checks, saw a 2.7% COLA increase in their January 2005 checks. That COLA increase was based upon Social Security comparing the CPI changes at the beginning and end of the October 2003 - September 2004 cycle. It determined that the CPI had increased by 2.7% and in October announced that percentage as the 2005 COLA. Social Security's COLA announcement has triggered action by local retirement boards on their COLAs, to be paid to eligible retirees this upcoming July.

"We must remember that the Social Security's CPI calculations are a first step toward the COLA decisions made here at the state and local levels," stressed Hill. "Under our pension law, local retirement boards have the discretion to establish an annual COLA above the CPI up to 3%, and almost all have done so.

"Regardless that the CPI calculations are not the final and absolute word on the state and local COLAs, there's no question that they carry considerable weight. As we've done over the years, we will continue to watch and report on important developments concerning the CPI."

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