How does the Consumer Price Index (CPI) affect cost of living adjustments when comparing nominal and real values?

The Consumer Price Index (CPI) measures how prices of goods and services change over time, reflecting the cost of living. When we talk about nominal values, we refer to the actual dollar amounts without adjusting for inflation, while real values are adjusted to account for changes in the CPI. For example, if your salary increases by 3% but the CPI shows that prices have risen by 4%, your real income has actually decreased because your purchasing power is lower. This means that cost of living adjustments, which are often tied to the CPI, help ensure that salaries keep up with inflation, allowing people to maintain their standard of living. Understanding the difference between nominal and real values is important because it shows how inflation can impact what you can actually buy with your money.