Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 8 The Data of Macroeconomics
Chapter 24 of 36 Measuring The Cost of Living
Section 11 of 16
…
Price indexes such as the consumer price index (CPI) are used to correct for inflation effects so dollar figures from different times can be compared.
When a dollar amount for a good or service is automatically corrected for price level changes by contract or law the amount is labeled indexed for inflation.
Between firms and unions, many long-term contracts include indexation of wages to the CPI.
This contract provision is called a cost-of-living allowance (COLA).
A COLA automatically raises wages when the CPI rises.
Indexation is also included in many laws.
Social Security benefit payments are adjusted yearly to compensate for price increases.
The tax rate brackets of the federal income tax are indexed for inflation.
… …

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