Let’s be clear: Hurricanes and tropical storms can be massively disruptive forces. No one wishes any part of the United States to have to deal with the potential destruction dealt by a tropical storm, let alone a hurricane. Whole communities can see their lives turned upside down, as happened with Hurricane Katrina and New Orleans.
Even smaller storm events, such as now being predicted for Laura and Marco, can force temporary business closures and evacuations that upset the normal rhythm.
When storms come through the Gulf of Mexico, these disruptions also have an effect on retail gasoline prices and the government’s Consumer Price Index, which is used to determine cost-of-living adjustments for Social Security recipients, as well as Federal government retirees.
CPI and COLA
The Consumer Price Index is published monthly by the U.S. Bureau of Labor Statistics. Rather than a single index, it is actually composed of many indexes.
By law, Social Security recipients and retirees under the Civil Service Retirement System (CSRS) have their benefits adjusted annually based on the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter average of one year (July-August-September) through the third quarter average of following year (July-August-September).
For Federal Employees’ Retirement System (FERS) retirees, if the increase in the CPI is 2 percent or less, the Cost-of-Living Adjustment (COLA) is equal to the CPI increase. If the CPI increase is more than 2 percent but no more than 3 percent, the Cost-of-Living Adjustment is 2 percent. If the CPI increase is more than 3 percent, the adjustment is 1 percent less than the CPI increase. The new amount is rounded down to the next whole dollar.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices of consumer items—goods and services that people buy for day-today living.
The CPI-W, the oldest of the series, covers a subset of the urban population. The CPI-W population consists of consumer units with clerical workers, sales workers, protective and other service workers, laborers, or construction workers. More than one-half of the consumer unit’s income has to be earned from these occupations, and at least one of the members must be employed for 37 weeks or more in an eligible occupation.
Gasoline prices and the CPI
When storms take a path through the Gulf of Mexico and into Texas and/or Louisiana, such as are being predicted for Laura and Marco, they cause large disruptions to oil and gas producers.
The majority of the refineries in the state of Texas are clustered near major sea ports along the Gulf Coast, predominately in the Houston area. The 10 refineries in the Houston metro process 2.6 million barrels of crude oil per calendar day – 45.1 percent of the state’s total production and 13.8 percent of the nation’s production.
The entire Gulf Coast Region – including Corpus Christi, Port Arthur and Beaumont, accounts for 86.9 percent of the state’s total production and more than a quarter of production in the United States, according to the Greater Houston Partnership.
Workers on offshore production platforms in the Gulf need to be evacuated ahead of the storm. Onshore, the transportation of oil and gas (by pipeline and ship) can also be interrupted by the storms. Flooding related to the storms can cause damage to facilities that takes time to repair.
As a result, supplies of gasoline are disrupted leading to price increases. The size of the price increase depends both on the amount and length of the disruption as well as on the demand for these products.
Hurricane Harvey struck the Louisiana and Texas coasts towards the end of August 2017. Even though the hurricane caused a temporary decrease in demand in those two states, nationally the disruption caused gasoline prices to rise.
The U.S. Department of Energy reported that U.S. retail gasoline prices on Monday, September 4, 2017, averaged $2.68 per gallon, $0.28 per gallon than prices a week ago, an increase of 11.6%.
The agency also reported that supply disruptions and refinery outages caused by Hurricane Harvey continued to affect gasoline supply and prices, particularly along the U.S. East Coast and the Gulf Coast, where gasoline prices were 39 cents/gal and 35 cents/gal higher, respectively, than they were a week ago before the full effects of the storm were felt.
The national CPI-W in 2017 reflected that change in prices. In July 2017, the CPI-W index for gasoline had declined 2.26% over the month. In August, the index rose 3.94%, and after the hurricane struck at the end of August, the CPI-W index for gasoline rose 10.57% in September.
The CPI-W All Items Index also reflected the effect, although to a lesser degree. In July, the All Items index posted a decline of 0.08% over the month. In August, the index rose 0.35%, and in September it grew by 0.62%.
When the average index for the 3rd quarter of 2017 was compared to the 3rd quarter of 2016, the result was a 2% COLA that went into effect in January 2018.
Other items, in addition to gasoline, have an effect on the All Items index; but gasoline prices tend to have a greater short-term impact both because they play a significant role in the market basket of goods and services consumed by the CPI-W population and because gasoline prices tend to fluctuate more than other items in the index.
Impact of Laura and Marco
Both the Laura and Marco storms are likely to have less impact on gasoline prices, and therefore the CPI and COLA, than Hurricane Harvey.
First, the storms may reach the Louisiana and Texas coasts as tropical storms rather than as hurricanes. While tropical storms are defined as having sustained winds of 39-73 miles per hour, Hurricane Harvey was a Category 4 Hurricane with its highest winds clocked at 130 mph.
Offsetting the lower wind speeds is the possibility of having two storms back-to-back, which has already caused evacuations from offshore production platforms and can lead to increased flooding of low-lying areas including refineries in Louisiana and most importantly Texas. Since storms are categorized by their winds rather than rainfall, a lower category storm can still produce more rainfall and related flooding than a higher category storm.
At the same time, demand for gasoline has been suppressed as the economic contraction related to the coronavirus has impacted the U.S. economy. Lower demand may cause a smaller rise in gasoline prices, although demand won’t change this year’s relative importance of gasoline to the CPI-W index because that measurement is changed only annually.
January 2021 COLA
In July 2020, the first of the three months included in the COLA calculation, the CPI-W rose 0.6% over the month and 0.96% over the year. (BLS reported the over-the-year increase as 1% because the agency rounds to one decimal point.)
After declining in March and April and essentially unchanged in May, the CPI-W has been climbing over the past two months.
In July, gasoline prices rose 4.8% over the month, although they remained 20.5% below the level of a year ago.
The August CPI will be issued on September 11, and that will give policymakers a better idea on the extent of the upcoming COLA.