Editing Inflation (section)

=== Cost-of-living allowance ===

{{See also|Cost of living}}

The real purchasing power of fixed payments is eroded by inflation unless they are inflation-adjusted to keep their real values constant. In many countries, employment contracts, pension benefits, and government entitlements (such as [[social security]]) are tied to a cost-of-living index, typically to the [[consumer price index]].<ref name="cola wars">{{cite web |url=http://www.govexec.com/dailyfed/0906/090806rp.htm |title=COLA Wars |date=September 8, 2006 |work=Government Executive |publisher=[[National Journal Group]] |access-date=September 23, 2008 |last=Flanagan |first=Tammy |archive-url=https://web.archive.org/web/20081005120234/http://www.govexec.com/dailyfed/0906/090806rp.htm |archive-date=October 5, 2008 |url-status=dead }}</ref> A ''cost-of-living adjustment'' (COLA) adjusts salaries based on changes in a cost-of-living index.<ref>{{Cite web |last=Kunkel |first=Sue |title=Cost-Of-Living Adjustment (COLA) |url=https://www.ssa.gov/oact/cola/colasummary.html |url-status=live |archive-url=https://web.archive.org/web/20211127155725/https://www.ssa.gov/OACT/COLA/colasummary.html |archive-date=November 27, 2021 |access-date=2018-05-15 |website=www.ssa.gov |language=en-us}}</ref> It does not control inflation, but rather seeks to mitigate the consequences of inflation for those on fixed incomes. Salaries are typically adjusted annually in low inflation economies. During hyperinflation they are adjusted more often.<ref name="cola wars" /> They may also be tied to a cost-of-living index that varies by geographic location if the employee moves.

Annual escalation clauses in employment contracts can specify retroactive or future percentage increases in worker pay which are not tied to any index. These negotiated increases in pay are colloquially referred to as cost-of-living adjustments ("COLAs") or cost-of-living increases because of their similarity to increases tied to externally determined indexes.