What Is a Cost-of-Living Increase in Salary?

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A cost-of-living salary increase is an annual salary increase to compensate for loss of purchasing power due to price increases, or inflation. This salary increase is also called indexation or cost-of-living adjustment, or COLA.

The COLA percentage is usually derived from the previous year's Consumer Price Index level. COLAs also apply to Social Security benefits.

Some organizations use the term cost-of-living adjustment or cost-of-living allowance to refer to a salary increase to offset the change in cost of living for employees who transfer to another city or country. For example, military members can be compensated if they are stationed in so-called high-cost locations, both in the United States and overseas.