Glossary
Consumer Price Index (CPI)
The Consumer Price Index measures the average change over time in the prices urban households pay for a fixed basket of goods and services. In contracts it is used for rent reviews, wage-linked terms, and long service agreements rather than for raw-material costs.
Also called: CPI, CPI-U, cost of living index.
CPI reflects retail prices including taxes and retail margins, so it moves
more smoothly than a commodity PPI and rarely spikes the
way a single input material can. That makes it a poor proxy for a steel or
resin cost pass-through, and a reasonable proxy for general operating-cost
drift in a multi-year service contract.
A worked example: a lease sets annual rent to rise by the change in
CPI-U between the two prior Decembers. If CPI-U goes from 305.0 to 315.2,
the increase is 315.2 / 305.0 = 1.033, so rent rises 3.3 percent.
Watch which CPI: CPI-U (all urban consumers) and CPI-W (urban wage
earners) differ, and regional sub-indices differ again. Name one.
See CPI vs PPI for price adjustment
and the Employment Cost Index.
Related terms
De-escalation is the downward half of a price adjustment clause: when the chosen index falls below its base value, the covered portion of the price is reduced by the same ratio mechanism that would have raised it.
Economic price adjustment is the US federal government's term for a price escalation clause in a fixed-price contract. The Federal Acquisition Regulation defines three standard EPA clauses at FAR 52.216-2, -3, and -4.
The Employment Cost Index measures the change in employer labor cost, wages plus benefits, holding the mix of jobs fixed. Labor-heavy service and construction contracts use it to escalate the workforce portion of a price without re-pricing the whole contract.
An escalation clause (also called a price escalation clause or price adjustment mechanism) is contract language that adjusts a price up or down over time using a named index, a formula, and a schedule, so neither party carries the full risk of cost changes between signing and delivery.
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