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Because housing prices have rocketed by double-digit rates in the last two years, it is possible that the CPI measure will keep running hotter than the PCE for months to come. Nonetheless, governmental salary and pension policy decisions and labor agreements will be driven by the CPI. To set monetary policy, it is likely that the Federal Reserve board will keep paying closer attention to the PCE to guide it in raising interest rates. ownership status, when the latter’s mortgage rates were set, and who has what kind of property tax protection. Those housing and medical-cost factors alone would seem to make the CPI more relevant to public workers’ pay rates, although some could argue that younger and older workers have varying housing inflation pressures depending on renter vs. The CPI weighs housing costs more heavily (at roughly one-third of the index) than the Commerce Department’s PCE, while placing a lower weighting on medical expenses that are often covered by public employer-subsidized health insurance. As a result, the Labor Department’s CPI became the common standard used in the public sector for COLA adjustments. Many public pension funds first tried to make unsystematic, ad hoc inflation adjustments, but that became a political and actuarial nightmare because those one-off, emotion-influenced adjustments were unfunded, which made a mess of the pensions’ financial structures. Social Security began paying out COLAs in 1975 (the three-month average of urban wage earners’ CPI increases it uses is projected to invoke a 9-plus percent COLA increase for recipients in 2023).ĬOLA indexing became popular in public-sector labor agreements around that time.

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It’s not surprising that parties with competing viewpoints will cherry-pick their data, as well as which time windows in the past or the future are most relevant in making compensation adjustments.Ĭost-of-living adjustments have been around for decades, and became commonplace in the “stagflationary” 1970s.

That disparity illustrates the complexity of calibrating inflation at the state and local government level. The comparable CPI rate for the same period was 9 percent, and came in at 8.5 percent for July. (Source: The Washington Post, from Bureau of Labor Statistics data)The latest inflation report that is watched closely by the Federal Reserve showed “personal consumption expenditure” (PCE) inflation at 6.3 percent for May, lately far lower than the Consumer Price Index (CPI) of year-over-year inflation that’s commonly used for labor agreements and pension adjustments.

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