Harboring a desire for inflation to go up is generally uncommon. But, for retirees who receive a cost-of-living-adjustment (COLA) adjustment in their January paychecks, it is understandable if they are hoping for some inflation to pop up in government measurements in order for a COLA increase that would show up in the January 2020 checks.
For those who may desire some inflation, they will be disappointed in the latest COLA figures that will impact civil service annuities for 2020.
In August, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) showed a slight decrease in prices in August 2019. The CPI-W is important because it is the measure of inflation used to calculate any COLA for the coming year.
As of August, the CPI-W is now 1.53 percent higher than the average CPI-W for the third quarter of 2018. This will sound like
In 2019, the COLA was 2.8 percent for
Understanding the COLA Calculation
Here is what goes into the annual COLA calculation:
- CPI-W readings are taken from the third quarter (July – September) of the current year.
- These data are compared to the average CPI-W reading from the third quarter of the previous year (2018).
- The average reading from the third quarter of the current year (2019) is compared to the figure from the third quarter of 2018.
- If the average CPI-W reading goes up in 2019, then the difference, rounded to the nearest 0.1%, is what beneficiaries will generally receive as an increase in 2020.
- 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 percentage change in the relevant quarterly price index from the previous year (the final number is adjusted to the nearest 1/10 of 1 percent).
Understanding the CPI-W
These are several significant spending areas that, according to the Bureau of Labor Statistics (BLS), have the biggest impact on next year’s COLA. In parenthesis are examples from the BLS of the kinds of expenses in each major spending category.
There are the major spending categories:
- 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).
While medical care is often among the most important spending categories for COLA recipients, because older people often have higher medical costs, the CPI-W often does not take into account the higher medical care and housing costs for seniors. Expenses, such as clothing, transportation, and education are often less important for seniors than for other groups of people.
Probable COLA Increase for 2020
We will not know the actual amount of a COLA increase that there will be for 2020. Based on the information to date, a reasonable estimate is that the increase will be about 1.5 or 1.6%.
But this is how the system works and what will go into a decision as to how much of an increase there will be in a retirement annuity or Social Security benefit for the next year. It is very likely the increase will be less than the 2.8% increase for 2019.