There is always considerable interest among federal retirees and Social Security recipients on what the annual cost of living adjustment (COLA) will be for the next year. In this case, the annual COLA increase will begin in January 2019.
What is the CPI-W?
The 2019 COLA amount will not be available until mid-October. Based on the current inflation trend, it is very likely there will be a COLA increase in 2019.
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 3.2 percent over the last 12 months to an index level of 246.155. Be forewarned: this does not indicate COLA recipients will receive a 3.2 percent increase next January. The CPI-W is the index used to calculate the COLA, but the COLA amount is not based on a 12 month comparison.
In 2018, beneficiaries who were entitled to the full increase received a 2% COLA. This was the highest increase in six years.
The CPI-W figure for July 2018 was 2.71 percent higher than the average CPI-W for the third quarter of 2017—which will be used to determine the 2019 COLA.
Here is how it works:
- CPI-W readings are taken from the third quarter (July – September) of the current year.
- This data are compared to the average CPI-W reading from the third quarter of the previous year (2017).
- The average reading from the third quarter of the current year (2018) is compared to the figure from the third quarter of 2017.
- If the average CPI-W reading goes up in 2018, then the difference, rounded to the nearest 0.1%, is what beneficiaries will receive as an increase in 2019.
- If the figure is lower— indicating deflation—no adjustment is made. That has happened several times over the past decade.
How is the COLA Calculated?
The amount of a COLA is determined by the percent of change in the base quarter price index from the previous year to the year in which the COLA is to become effective (the final number is adjusted to nearest 1/10 of 1 percent).
What Goes into the CPI-W?
These are the eight most significant spending areas that, according to the Bureau of Labor Statistics (BLS), have the biggest impact on whether beneficiaries of the next COLA will receive an increase. In parenthesis are examples from the BLS of the kinds of expenses in each major spending category.
- Food and beverages (cereal, milk, chicken, wine, full-service meals, snacks)
- Housing (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture)
- Apparel (men’s shirts and sweaters, women’s dresses, jewelry)
- Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance)
- Medical care (prescription drugs and medical supplies, physicians’ services, hospital services)
- Recreation (televisions, toys, pets and pet products, sports equipment, admissions)
- Education and communication (college tuition, postage, telephone services, computer software and accessories)
- Other goods and services (tobacco and smoking products, haircuts and personal services)
The CPI-W calculation does not always work out well for retirees. While medical care is often among the most important spending categories for COLA recipients, the CPI-W often does not take into account the higher medical care and housing costs for seniors compared to younger people in the urban and clerical worker category. Expenses, such as apparel, transportation, and education are often less important for seniors than for other groups of people.