Inflation has not gone away. In fact, while federal employees and retirees are now receiving larger paychecks as of January, the real news is that inflation is way ahead of any new pay increases, including the 2.7% average pay increase for federal employees and the 5.9% increase in COLA payments.
New 40-Year High for Inflation Rate: CPI-W Up 8.2% Over 12-Months
The latest government data has just been released reflecting how prices rose in January. In short, inflation is still surging.
This widely watched Consumer Price Index reflects inflation hitting another 40-year high. Strong consumer demand, pandemic-related supply-chain problems, and large amounts of government spending, much of it related to the pandemic, fueled rapid price gains that destroyed the benefits of rising wages for most Americans.
According to the latest data, the consumer price index went up 7.5% in January from one year ago. This is the fastest increase since February 1982, when inflation hit 7.6%. The Consumer Price Index (CPI), measures a variety of goods ranging from gasoline and health care to groceries and rents. This index rose 0.6% in the one-month period from December.
Many federal employees and retirees are more familiar with the CPI-W index as that index is the one used to calculate the amount of the COLA that will be paid starting in January 2023. The CPI-W index is now up 8.2% over the past 12 months.
For those who may be wondering, the COLA for the next year will be announced in October and based on inflation data from July-September.
How Have Raises, COLAs Compared to Inflation Rate? 45 Years of Data
A few readers recently asked about the inflation rate and how federal employee raises and COLAs compare.
The question is not easy to answer. The systems for determining pay raises and COLAs are different.
Also, there are different ways to track the inflation rate. In other words, any comparison is subject to how the data are tallied.
The federal government has created a system that obfuscates actual comparisons. This may benefit politicians in some cases, it may be done to satisfy interest groups that influence federal policies, and it may be done to save money.
In other words, do not expect any yearly pay raise or COLA to match the inflation rate. In the best of years, the increase in payments will be based on data from a prior year so it is always going to be behind, and, in most years, that means purchasing power will lag behind the real rate of inflation.
The data in the chart below are from the Bureau of Labor Statistics (BLS). The data are not manufactured but there are different ways to calculate inflation.
For example, in 2021 inflation started to go up and it is still going up fast. Over a 12-month period, inflation went up 7%. The average monthly inflation rate was 4.7%. In some years, using the increase over a 12-month period will show higher inflation. In other years, the opposite is true.
For this chart, we used BLS data reflecting the average rate of inflation throughout the year. BLS calculates inflation in different ways. The purpose of the chart below is to show how raises and COLA payments have increased over time compared to the rate of inflation.
We picked a starting date for the chart of 1975.
The reason for this is that, since 1975, Social Security general benefit increases have been cost-of-living adjustments or COLAs. The 1975-82 COLAs were effective with Social Security benefits payable for June in each of those years; thereafter COLAs have been effective with benefits payable for December. Prior to 1975, Social Security benefit increases were set by legislation.
Average and Highest Inflation Rates and Pay Raises
The data in the chart will surprise some readers. We are always inclined to look at recent events and apply that to past history. The chart displays data from 1975-2021 and through 2022 for the annual federal pay raise.
The average inflation for this time period is 3.73%. The average pay raise for these years is 3.20%. The average COLA payment has been 3.7%.
The highest pay raise was in 1980 when the raise was 9.10%. Inflation for that year was 13.5% and the COLA was 14.3%.
The lowest pay raise for any year was zero. There were no federal pay raises in these years:
The 2022 average pay raise of 2.7% was the highest raise since 2006. In 2006, the raise was 3.1% and the COLA was 3.3%. In 2006, inflation was at 3.2%.
The United States is on track to have the highest inflation since 1980. Of course, the Federal Reserve is going to start raising interest rates which will likely dampen inflation. Presumably, the supply chain problems will dissipate and that may also have a dampening impact on the rate of inflation.
The president’s budget will reportedly propose a federal pay raise of 4.6%. If that happens, that would be the highest federal employee pay raise since 2000 when the raise was 4.8%.
The rate of inflation for 2022 will not be known until January 2023.
Chart Displaying Inflation Rate, Federal Pay Raises and COLAs