How does the Consumer Price Index (CPI) help in making cost of living adjustments, particularly when distinguishing between nominal and real values in economic indicators?

The Consumer Price Index (CPI) is a tool that measures how prices of goods and services change over time, helping us understand inflation. When people talk about cost of living adjustments, they mean that salaries or benefits need to increase to match rising prices so that people can maintain their purchasing power. The CPI helps distinguish between nominal values, which are the actual numbers people see on their paychecks, and real values, which account for inflation and reflect what those numbers actually mean in terms of buying power. For example, if your salary increases from $50,000 to $52,000, but the CPI shows that prices have risen by 4%, your real income hasn’t increased because the extra money doesn’t buy more than you could before. By using the CPI, employers and policymakers can make informed decisions about how much to raise wages or benefits to ensure people can afford their everyday expenses.