An escalator clause is a stipulation in CONTRACTs that adjusts the agreed-on price when costs change. Generally business transactions include an agreed price, but often market conditions are volatile, and the seller can potentially lose money if his or her costs increase between the time the price is agreed on and when the transaction is completed. Escalator clauses protect sellers against this risk. Escalator clauses are common in business-supply contracts, labor agreements, utility pricing, and lease arrangements. Usually an escalator clause is tied to changes in a cost index such as the CONSUMER PRICE INDEX (CPI), the price reported in a market exchange such as the CHICAGO MERCANTILE EXCHANGE or some other industrial cost index to which both parties agree. Escalator clauses are more common during periods of uncertainty and INFLATION. In recent years, with dramatically changing oil and natural gas prices, utility companies, airlines, and chemical manufacturers have all resorted to escalator clauses. In the 1980s, most union contracts added escalator clauses to protect workers’ wages against inflation. Many long-term rental agreements contain clauses raising the rent a set percentage annually. Critics contend escalator clauses reduce producers’ incentives to operate efficiently, instead just passing along cost increases to customers. When escalator clauses are used, it is important to clearly define what index or price is to be used and how often prices are to be adjusted. In multimillion-dollar transactions, small details such as using the national CPI or regional index, end-of-the-day or average for the day price on a commodity exchange can significantly affect costs and PROFITs.