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The calculation is made by comparing the average CPI from July through September of the current fiscal year to the average for the same months of the year prior. Remember, active duty pay raises are calculated differently.
This information is calculated from the non-seasonally adjusted Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Calculation for monthly COLA change: (Monthly CPI-Yearly baseline CPI)/Yearly baseline CPI.
Learn more about CPI on the BLS web page.