Hurricanes can have disastrous effects on communities in their path, but they can also have consequences on seemingly unrelated issues, such as the 2018 Federal retiree and Social Security cost-of-living adjustment.
In the case of Hurricane Harvey, higher gasoline prices resulting from the storm’s disruption of supplies can provide a boost to the 2018 COLA, depending on the storm’s severity and longevity.
The hurricane is forcing refineries to suspend operations. Depending on the severity, it may also cause longer-term damage to oil refineries and transport facilities. Work is further disrupted as employees evacuate the area hit by the storm, and transportation of refined products slows as ships are unable to load product in storm-hit areas.
Higher gas prices are already appearing in areas served by Texas and Louisiana refineries (which includes the South, Midwest, and the East Coast) with lesser effects on the West Coast, which has its own refineries and supplies.
Although the hurricane is a disaster for people living along the Texas coastline, the timing of Hurricane Harvey’s arrival is fortuitous for those hoping for a larger COLA, hitting the U.S. during the three-month period used for determining the 2018 increase.
Impact of gasoline on inflation
Gasoline prices are volatile, and sharp moves up and down can significantly impact the Consumer Price Index used to determine the annual COLA.
“Gasoline prices are so much more volatile than other CPI components that, even though gasoline makes up less than 6 percent of the CPI, it is often the main source of monthly price movements in the all items index,” according to a Bureau of Labor Statistics report.
In July, gasoline prices declined 2.3%, following drops of 1.5% in May, and 1.7% in June; although for the 12 months ending in July, the gasoline index was up 2.9%. This compares to a 1.6% rise in the all items index since July 2016.
Another advantage for COLA recipients is that gasoline has relatively more importance for the CPI-W (which is used to calculate the COLA), than it does for the more widely-known CPI-U index. Any uptick in gasoline prices will have a larger effect on retirees than if the government was following other measures of inflation.
While it is easy to predict a short-term spike in gas prices at the pump, the impact on the CPI is less predictable.
Another time, another hurricane
Back in September 2008, Hurricane Ike threatened the Texas coast coming a month after Hurricane Dolly. At the time, NBC speculated on whether the hurricanes would cause a spike in gas prices.
“We’ve had two hurricanes two weeks apart that have taken out probably 3 million barrels a day of refining capacity or 16 percent of the nation’s total,” said oil industry consultant Andy Lipow. “Supplies are going to get thin.”
Hurricane Ike did cause devastation along the Texas and Louisiana coastlines with damage estimates of about $29.5 billion dollars, but the hurricane’s impact on gas prices was short-term only. The CPI-W index for gasoline actually declined in September and continued to drop the rest of that year.
On the other hand, in 2005, Hurricane Katrina hit Louisiana and Hurricane Rita hit the Texas-Louisiana coast. That September, the CPI-W index for gasoline jumped 17.4% in one month, and helped by the rise in gasoline prices, the January 2009 COLA came in at 5.8%, its highest level in more than 20 years.
Timing for 2018 COLA
Another consideration is that any spikes in retail gasoline prices will be spread out between the August and September pricing periods, since the storm did not arrive until the last 7 days of the month.
BLS collects its retail data over the entire month, so much of the gas price collection for August has already been completed.
“A specific amount of data must be collected in each of three pricing periods that encompass the month; within these periods, data collectors have discretion over when to collect prices. It is likely that more data are collected early in each period, meaning that there is some front loading of the data,” according to BLS.
The impact of Hurricane Harvey will be muted in the August CPI, to be released September 14. We won’t know the true impact on the COLA until the September CPI is released.
Sustained supply shortages and resulting price increases can have a noticeable effect on the overall COLA calculation, but if prices rocket up and then drop back swiftly in a week, there won’t be much effect on the COLA.
Retirees will have to wait and continue to hope for the best, which perversely in this case, means a large and prolonged disruption of gasoline supplies through the end of September.
