Total Inflation Rate for 2021: 7%
2021 was not a good year for inflation. The latest report from the Bureau of Labor Statistics shows an annual increase in the inflation rate of 7% for the year.
Using a different index, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) went up 7.8% for the year.
If this type of inflation seems unusual, it is unusual. If you remember songs that were high on the rating charts in 1982 like—”Physical” (by Olivia Newton-John) or “I Can’t Go for That” (Hall and Oates)—the inflation rate from last year may bring back some unpleasant memories. The 2021 inflation rate is the highest inflation rate since 1982 when it was 6.16%.
CPI-W Inflation Rate
Readers who pay close attention to the annual cost of living adjustment (COLA) recognize the CPI-W as the index used in determining the annual COLA that goes into effect each January. The COLA for 2022 was 5.9%—and 4.9% for readers under FERS—and that increase is now in effect. The recent data showing an increase of 7.8% for the year will not increase the COLA that has already been put into effect for this year.
Current federal employees received an average increase, including locality pay, of 2.7%. As usual, there are areas that received a higher pay raise. The Seattle-Tacoma area received the highest raise for 2022 with an increase of 3.21%. With a pay raise in 2022 of 3.02%, Washington, DC, and New York City locality pay areas were tied for 7th place in the 2022 list of locality play winners.
The “Rest of the U.S.” came in last, as usual, with a pay raise of 2.42%.
Real-World Impact of Rising Inflation Rate
Measuring the inflation rate is a tricky business and several indices are used by the federal government to measure inflation. While the overall rate came in at a 7% increase in 2021, several items that impact all of us were higher.
The gasoline index was up 49.6% for the year. Fortunately for many federal employees, working at home reduced the amount of money spent on buying gas to commute to work. On the other hand, working at home may have resulted in using more electricity while keeping the heat or air conditioning on during the day to remain comfortable. The electricity index was up 6.3% in 2021, so if readers think their utility costs were higher last year, the electricity index may have been a significant factor.
The “food at home” index only went up 6.5% in the past year so that increase was less than the overall rate of inflation. But, compared to an annual inflation rate of 1.5% in the cost of “food at home” over the past 10 years, the 2021 rate for this basic economic necessity is significant.
Impact of Annual Inflation Rate on 2022 Federal Pay Raise and COLA
Several readers have asked what the impact will be on the 2022 federal employee pay raise or the 2022 COLA for federal retirees. The quick answer is that the inflation rate will not have an impact on either figure. The amount of money to be paid to current federal employees or to federal retirees has been set for the year.
Higher inflation will lead to a higher COLA, but readers will not see the impact of inflation until January 2023 even if the actual rate of inflation continues to go up as it did in 2021. The annual COLA is determined by comparing the change in the CPI-W from year to year, but it is only based on the average for the months of July, August, and September. In other words, we will know in mid-October of 2022 what the COLA will be in 2023 using the rate for those three months.
With the annual rate of inflation now at 7.8% as calculated by the CPI-W, a 2022 pay raise of 2.7% and a 2022 COLA of 5.9% (4.9% for FERS employees) represent a loss of purchasing power and a reduction in the standard of living for federal employees. The increasing inflation rate could portend a larger pay raise for 2023 but those who may already be spending most of each paycheck on expenses may run into financial problems without following a budget that closely tracks expenses.
While there may be an indirect correlation, keep in mind that the annual federal employee raise is not based on inflation. It is based largely on salary levels in specific locality pay areas. Congress and the president make the annual determination of how much of a pay raise will be paid in 2023.
The reality is that the inflation rate has wiped out the value of the COLA and the 2022 pay raise for federal employees. The impact of that wipe-out will increase as the year goes on if inflation continues to rise. It is likely that future pay increases will also trail the rate of inflation.
Politics and the Inflation Rate
Under President Carter, inflation reached a high of about 14%. Inflation played a large role in his political future. President Carter’s economic net approval rating was -8 points in a January 1978 CBS News poll. That rating was the lowest around this point in a presidency before an average of President Biden’s economic approval rating reached -13 points.
President Biden now has the lowest net economic rating of any president at this point through his first term since President Jimmy Carter in 1977.
President Carter was defeated after his first term, in large part because of inflation. No doubt, this will impact presidential politics in the upcoming mid-term elections. We are still several years away from the next presidential election and we can expect the administration will work hard to reverse the inflation rate. High inflation impacts all American consumers and can have a major impact on the outcome of an election.
With the rapidly rising inflation rate and the political implications of this, federal employees may have some benefit as the political process used to determine any annual pay raise could reflect these political concerns. Perhaps that reflects wishful thinking by readers hoping for a larger raise in 2023. At any rate, the purchasing power of everyone’s income goes down as the inflation rate goes up.