Update on Harvey’s Impact on Gas Prices and COLA

Hurricane Harvey has created a disruption in oil production and gas prices which could impact next year’s COLA. The author provides an update.

In mid-August, prior to then-Hurricane Harvey making landfall in Texas, I estimated that the July CPI-W numbers indicated a projected January 2018 cost-of-living adjustment (COLA) for Federal retirees and Social Security beneficiaries in the range of 1.5% to 1.7%, about the same percentage increase as in 2013, 2014, and 2015 (See Be Prepared for a Moderate COLA in January).

On the day that the storm made landfall, I wrote about the possibility that the storm could boost the 2018 COLA by causing higher gasoline prices as a result of supply disruptions (See Hurricane Harvey, Gas Prices, and COLA).

As I wrote then, the storm’s effect on the upcoming COLA would depend on its severity and longevity.

The amount of the 2018 COLA is important, not only to recipients, but also to the government, as a higher COLA results in greater Federal budget outlays in a time of fiscal deficits and concerns about the long-term viability of Social Security.

Here is an update and the prospects for the January 2018 COLA.

Current status of gasoline prices and supplies

While the storm did some damage to oil production, the main effects are from damage to petroleum refiners and transportation facilities. The result is an abundance of crude oil, but a shortage of refined product. Since consumers buy refined petroleum products, not crude oil, a lower crude oil price will not affect the Consumer Price Index used to determine the 2018 COLA.

After the storm made landfall, GasBuddy.com estimated that increases of 20-35 cent/gallon increase in the Gulf, 10-25 cent/gallon increase in the Midwest, and a 5-10 cent/gallon increase in the Rockies, East Coast and West Coast.

On Labor Day, AAA estimated that unleaded gasoline prices have climbed 11.4% over the past week and 12.5% over the past month.

Colonial Pipeline, which is a major supplier of refined petroleum products to the Southeast and East Coast shut down its pipeline because it was unable to obtain sufficient supplies due to damage to its Texas facilities and damage to refineries that supply product to the pipeline. It expected to resume activities on Labor Day, which will ease the fear of shortages on the East Coast.

The Financial Times has reported that ships filled with refined petroleum products are being diverted from Europe and Asia to the United States as oil traders see opportunities for higher prices and greater profits in supplying refined petroleum to the U.S.

How gas prices affect the COLA

Federal law requires that an annual cost-of-living adjustment (COLA) be calculated for Federal retirees and Social Security beneficiaries based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), All Items Index.

It is calculated as the average of the July, August, and September indexes for one year compared to that same index for the following year. In 2016, that calculation showed a 0.3% rise, which then became the amount of the January 2017 COLA.

While gasoline accounts for only a small component of the Consumer Price Index, sharp increases and falls in price give it an outsized effect on the overall index (known as the All Items Index).

“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. BLS is responsible for the monthly CPI.

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.

Considering the July, August, and September CPIs

Even before the storm, gasoline prices had shown some moderate increase over the past 12 months. In July and before the storm, the CPI-W index for gasoline, all types, dropped 2.3% over the month, although it was still 2.9% higher than a year ago.

Bureau of Labor Statistics part-time data collectors collect their information over an entire month by visiting retail establishments and recording current prices. While data collection is broken up into three pricing periods each month, collectors tend to do more work at the beginning of each pricing period to be sure they meet their deadlines.

Most data collection for August had already been completed prior to the storm’s landfall, so the August CPI, which is released on September 14, will not reflect the most recent changes in gasoline prices.

To see if the storm has any lasting effects on the price of gasoline, we will have to wait until the September CPI is released in October.

September data collection will not begin in earnest until September 5, the Tuesday after the Labor Day holiday, and will continue throughout the month.

Because data collection occurs over three pricing periods in the month, some of the data collected will reflect retail gas prices early in the month while other data will capture prices later in the month.

The BLS September CPI index released in October will reflect the approximate average price change of gasoline for the entire month of September.

About the Author

Michael Wald is a public affairs consultant and writer based in the Atlanta area. He specializes in topics related to government and labor issues. Prior to his retirement from the U.S. Department of Labor, he served as the agency’s Southeast Regional Director of Public Affairs and Southeast Regional Economist.