What Is a COLA?
A cost-of-living adjustment (COLA) is an increase in wages or benefits intended to offset inflation, so that purchasing power stays roughly the same. COLAs are commonly tied to a price index, such as the Consumer Price Index, and are used in some employment contracts, pensions, and government benefits like US Social Security.
COLA vs. Merit Raise
A COLA aims to keep pay level in real terms as prices rise; a merit raise rewards performance and increases real pay. An increase smaller than inflation still leaves purchasing power lower than before.
How It Is Calculated
A typical COLA applies the percentage change in the chosen price index over a period to the current wage or benefit amount.
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Last updated: September 27, 2026. This definition is for general educational purposes only. It is not financial, investment, tax, legal, or medical advice, and it does not recommend any product or course of action. For decisions about your own situation, consult a qualified professional.