What is Consumer Price Index (CPI)?

The Consumer Price Index is the most widely used measure of inflation and forms the basis for price escalation clauses in most commercial supplier agreements. The index tracks the average price change of a fixed basket of goods and services that represents typical household consumption.

In contract practice, CPI is the standard reference for price indexation clauses. A supplier may contractually agree that its prices increase annually by "the CPI for the preceding year" or "the change in the national consumer price index." The exact wording determines which specific CPI figure applies — and this matters because different national statistics offices publish several CPI variants.

These variants may include: the all-items CPI (the most commonly used), a CPI excluding energy or volatile items, and the Harmonised Index of Consumer Prices (HICP), which is the standardised European measure used by the ECB. Contracts that reference "the CPI" without further specification leave room for interpretation. It is better to name the precise index and the exact publication source.

Alternatives to CPI include wage cost indices and sector-specific price indices — for example, a building cost index or a cleaning sector wage index. For labour-intensive services, a wage-based index may more accurately reflect the supplier's actual cost increase than the general CPI.

Following the high-inflation period of 2022 to 2023, CPI-linked indexation clauses attracted significant attention. Suppliers applied CPI-based increases of 10 percent or more in a single year. Contracts with uncapped CPI indexation proved unexpectedly expensive for buyers. For long-term contracts, limiting annual CPI increases to a negotiated cap is prudent risk management.

CPI indexation is the standard mechanism suppliers use to pass on inflation. For buyers, it can — during periods of elevated inflation — produce sharp annual price increases that were not anticipated when the contract was signed.

A contract that increases annually by CPI without a cap can, over a five-year term, result in a substantially higher price than projected at inception. For SMBs entering multi-year agreements, negotiating a maximum annual indexation rate and documenting the indexation methodology explicitly in the contract protects the budget and avoids disputes.