As many of us now expect, the current inflation is not going to be “transitory” as was being touted a few months ago to relieve anxiety among American voters. Instead, inflation is increasing quite rapidly in 2022 and will have an impact on the 2023 COLA estimates for federal retirees and Social Security recipients.
The latest figures, reflecting the economy in March, show that the Consumer Price Index for All Urban Consumers (CPI-U) increased 1.2 percent in March after rising 0.8 percent in February. For the last 12 months, the “all items index” is up 8.5 percent.
This increase in inflation is the fastest increase since January 1982, when inflation hit 8.4%. As explained below, the rate of inflation today is probably higher than in 1982 because the way inflation is actually measured has changed in the past 40 years.
2022 Inflation and the 2023 COLA
The annual cost of living adjustment (COLA) is based on an index compiled by the federal government’s Bureau of Labor Statistics. This index is the CPI-W. This stands for the Consumer Price Index for Urban Wage Earners and Clerical Workers. This index has gone up 9.4 percent over the last 12 months.
Here is how the COLA calculation works:
- Consumer Price Index (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 (2021).
- The average reading from the third quarter of the current year (2022) is compared to the figure from the third quarter of 2021.
- The difference, rounded to the nearest 0.1%, is what beneficiaries will receive as an increase in 2023.
- The question is how much will inflation increase and what will the final COLA calculation be. The answer to this will be calculated and announced in mid-October.
- Last year, federal retirees received a 5.9 percent COLA increase in 2021 for Civil Service Retirement System (CSRS) annuities and Social Security benefits. There was a 4.9 percent increase for Federal Employees Retirement System (FERS) annuities beginning in January 2022.
So far in 2022, there is an increase of 5.50% from the average CPI-W for the third quarter of 2021. The annual COLA is determined by comparing the change in the CPI-W from year to year, based on the average of the third-quarter months of July, August, and September.
Last month, according to the Senior Citizens League, inflation data suggested there may be a 7.6 percent COLA in 2023.
The Federal Reserve is starting to raise interest rates in an attempt to curb inflation later this year. Whether this will be successful or not remains to be seen. Obviously, so far, inflation is continuing to go higher.
While no one knows what will happen with inflation, some federal retirees and Social Security recipients could see a COLA bump of 8% in January 2023.
In effect, based on current trends there is going to be a significant COLA increase in 2023. Federal employees who may be considering retiring this year should be aware of how the COLA is calculated for new retirees if they hope to take advantage of a large 2023 COLA.
Reality Vs. Reported Rate of Inflation
As bad as the latest inflation report appears to be, it may actually be much worse.
For many years, consumer inflation was estimated by measuring price changes in a fixed-weight basket of goods. In other words, it measured the cost of living for maintaining a constant standard of living for an individual or a family.
Rising inflation has political consequences though. Elections can be won or lost based on the rate of inflation. But, for whatever reason, a new theory of measuring inflation emerged in the 1980’s and 1990’s.
A family could, for example, spend less money on food by buying chicken because it is less expensive than t-bone steak.
Using a fixed-weight basket of goods, inflation would be measured by comparing the cost of the t-bone steak from one year to another. Over time, a different measurement evolved. In other words, comparing what a family actually spent on food from one year to the next may be the same, but it is only the same because the family switched to chicken instead of eating steak. The “level of satisfaction” by the consumer may be the same despite eating less expensive food.
Maintaining a constant-standard-of-living means being able to consume the same goods in the same quantity, without having to trade off quality versus price. Tracking the spending for lower-priced and lower-quality goods in the food basket lowers the rate of inflation and reduces the amount of money spent by the government for various programs such as federal employee retirement and COLAs.
The new inflation measure was based on the argument that the changes would more accurately reflect the rate of inflation by measuring the cost-of-living rather than the rise in prices of specific goods.
There is little doubt that the changes in calculating inflation have led to confusion but have also led to keeping government expenses lower.
For readers who think they have noticed a significant change in their purchasing power over one or more decades, despite having received an annual raise or COLA, the conclusion that your purchasing power has declined is not just your imagination. If the t-bone steak you used to buy is now a memory, and your family has more chicken or stew instead of steak, the decline in actual purchasing power, even with an annual COLA or pay raise, may be the reason the steak is not on your plate as often.
Where Was the Most Increase in Inflation in March?
The increase in prices for gas, shelter, and food had the largest price increases.
Gasoline went up 18.3%, according to BLS. The food index was up 1% and the food at home index went up 1.5%.
The federal government will reportedly announce later today that the Environmental Protection Agency will allow E15 gasoline—gas with a 15% ethanol blend—to be sold in the United States this summer to try to lower the rapid rise in gas prices. Whether using this gas formula in a car is a good idea or not is open to debate.
Older cars, for which this gas formula is not recommended, will probably see a decline in performance and deterioration of some engine components. There is also likely to be lower gas mileage along with a lower price. Newer cars often come with a recommendation that using E15 gas is not harmful to the engine of some or many newer model cars.
In contrast to E10, which is most of the gasoline sold in the United States, the sale of E15 is typically banned during the summer months by the Clean Air Act because of air pollution concerns.