Inflation Jumps to 5% Annual Increase: Latest COLA Estimate for 2022

Inflation is increasing more than expected. The May inflation rate was 5% over a 12-month period. What does this mean for the annual COLA?

The Bureau of Labor Statistics has released the latest inflation data. Known as the Consumer Price Index (CPI), these data determine the annual cost of living adjustment (COLA) for federal retirees and Social Security recipients. The first check reflecting a new rate will be received in January by eligible recipients.

Keep in mind, the final COLA adjustment for 2022 will not be known until mid-October 2021. The COLA rate is an automatic calculation determined through a fairly complex calculation.

Biggest 12-Month Inflation Gain Since 2008

Over the past 12 months, inflation has jumped overall at its highest rate since August 2008. The overall inflation rate over the past 12-month period is up 5 percent. In August 2008, inflation jumped by 5.8 percent. The COLA adjustment in 2009 was 5.8 percent.

For adjusting the annual COLA, the biggest factor is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is the index used to determine the COLA adjustment. In May, this index rose 0.9 percent prior to BLS making any seasonal adjustment.

Inflation Rate Increasing

For those who like to track these data, last month, FedSmith reported the consumer-price index jumped 4.2% in April from one year earlier. This was an increase from 2.6% for the year ended in March. The April figure was the highest 12-month level since the summer of 2008.

In other words, the figures are increasing (5 percent in May 2021 and 4.2 percent in April 2021) and therefore displaying a growing increase in the amount of inflation in the United States.

Removing food and energy data, which are more volatile figures, inflation was 3.8% over a 12- month period. That is the biggest increase in the core inflation rate since June 1992.

Projection of COLA Increase for 2022: 5.3%?

While no one knows the exact percentage of the COLA increase retirees will see in January, we do know there will be an increase. That is different than in some recent years when there was not any increase.

Last month, the Kiplinger Letter projected the annual cost-of-living adjustment for Social Security benefits for 2022 would be 4.5%. The Senior Citizens League has recently projected an increase of 5.3 percent.

The May rate of inflation was higher than anticipated. It is likely the inflation rate will increase again in June. According to the Wall Street Journal, about 48% of small businesses have raised their average selling prices in May. This is the highest this has been since 1981. The Journal also noted that food makers said their costs are climbing at an “alarming rate”, prompting the highest price increases in the past decade.

In other words, the earlier predictions of the COLA amount for 2022 are likely to prove too low. If inflation continues to rises, the COLA amount is likely to approach 5%. In any event, the COLA rate for 2022 is virtually certain to be the highest increase since 2008.

In 2022, it is likely retirees will see a big turnaround in their COLA. Some retirees will remember an annual COLA increase of 0% in 2010, 2011, and 2016 and 0.3% in 2017. Last year it was 1.3%. An increase of 5% would be appreciated by many. Of course, the actual rate of inflation for necessary items like food and gasoline will be higher than the COLA increase so any overall benefit will be minimal.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47