Inflation Rate, 2023 COLA, and Why TSP Dropped Dramatically in One Day

The 2022 inflation rate is rising rapidly. Here is why the TSP funds have fallen sharply and what it all means for the 2023 COLA estimate.

Is there a correlation between the 2022 inflation rate, the TSP, and the 2023 COLA? There is, and one day shows how much these items are intertwined.

In one day, from Wednesday, June 8 to Thursday, June 9, here is what happened with the TSP stock Funds:

  • C Fund dropped 2.37%
  • S Fund dropped 2.54%
  • I Fund dropped 2.16%

Why the sudden drop in value?

The reason is inflation. More accurately, it was because of fear of inflation by stock investors. More accurately still, it was the fear of inflation and the possibility it will shoot higher. A higher rate of inflation is also a precursor to an increase in interest rates by the Federal Reserve.

As it turns out, the fear of more rapid inflation was justified. As stock investors know from experience this year, the rise in inflation costs everyone more to pay for expenses. At the same time, your investment in stocks is dropping quicker than the inflation rate is going up.

When the stock market closed on June 9th, 2022, the year-to-date drop in the TSP stock funds stacks up this way:

  • C Fund: -15.13%
  • S Fund: -21.51%
  • I Fund: -13.88%

2022 Inflation Rate Heating Up

The Bureau of Labor Statistics released the inflation data for May on June 10. The dip last month in the rapid rising of the inflation rate was temporary. In April, inflation “only” went up 0.3%. In May, it shot up up another 1%. Over the last 12 months, the “all items index” in the consumer price index has increased by 8.6%.

After declining in April, the energy index rose 3.9% over the month with the gasoline index rising 4.1%. The food index rose 1.2% in May as the food at home index increased 1.4%.

How Much for a Gallon of Gas?

Most Americans buy gas for their car to get to work, buy groceries and run errands. Most of us may have been planning to go on a driving trip this summer with the fear of the COVID pandemic decreasing.

Many of us may be rethinking that vacation. With an average cost of a gallon of gas now about $5.00, filling a 20-gallon tank will be $100—unless you are driving in one of the many states with gas prices higher than the national average.

As of June 10, 2022, the average cost in the United States of a gallon of gas is now $4.986. Last year at this time, it was $3.073. When President Biden was inaugurated, the average price for a gallon of regular-grade gasoline was $2.39, according to AAA. That is an increase of about 96% since he became our president.

President Says Policies Have Eased Price Hikes

Before the most recent inflation data was released, President Biden said, “I know you gotta be frustrated. I can taste it,” when speaking to the country from the White House as he argued that his actions on energy and the economy have eased price hikes—including on gasoline.

He also said this week there is nothing else he can do about the price hikes. “There’s a lot going on right now but the idea we’re going to be able to click a switch, bring down the cost of gasoline, is not likely in the near term. Nor is it with regard to food,” he said at the White House, where he was staging an event on the infant formula shortage.

“The two challenges on the minds of most working families are prices at the pump and prices at the grocery store. Both of these challenges have been directly exacerbated by Putin’s war in Ukraine” according to President Biden.

With regard to the price of gas, some analysts do not agree there is nothing the president can do or that the increase in the cost of gas is not the result of the administration’s policies.

Today production is constrained by the Biden administration’s energy policy. During the presidential debates, Joe Biden promised to “end fossil fuels.” From the first day of his administration, Biden’s policies have been designed to fulfill his promise to dismantle fossil fuels. The president and the Green lobby are doing everything they can to prevent fossil fuel companies from producing more energy. Instead of using price controls, their tactics include not issuing permits and leases for oil and gas development, placing limits on production on federal lands, blocking pipelines, and discouraging financing for fossil fuel companies. These tactics have been every bit as effective as price controls in holding back America’s potential to respond to today’s higher prices with more energy production.

Soaring Oil Prices: An Unnecessary Hit to a Vulnerable Economy

Obviously, gas and food are important for all of us. Regardless of the underlying reasons, an increase in the cost of fuel ripples through the economy. A rapid increase in the cost of inflation impacts almost everything else we buy. While inflation is up more than 8.6% in one year, the cost of gas has increased almost 100% since he took office and more than 62% in the past year.

Inflation Rate and 2023 COLA: 9.6% Increase in CPI-W in One Year

Federal retirees and Social Security recipients are in for a substantial increase in January 2023. The annual COLA amount is based on the CPI-W index as measured by the Bureau of Labor Statistics. So far, there has been an even bigger increase in the CPI-W index than in the overall index that is used to report the annual inflation figure.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has gone up 9.3% over the last 12 months.

In the last month, the index is up 1.2%.

Last October, the COLA for 2022 was announced. Federal retirees received a 5.9% increase for Civil Service Retirement System (CSRS) annuities and Social Security benefits and a 4.9% increase for Federal Employees Retirement System (FERS) annuities starting in January 2022. This was the largest COLA increase in 40 years.

So far, it seems very likely that the 2023 COLA will easily beat the 2022 COLA.

The CPI-W figure for May 2022 was 288.022., 7.30% percent higher than the average CPI-W for the third quarter of 2021, which was 268.421.

That sounds like gobbledegook to most of us. Here is why this is important though if you are wondering about the 2023 COLA amount.

An annual COLA is calculated by comparing the change in the CPI-W from year to year. But, to clarify, this calculation is based only on the average of the third-quarter months of July, August, and September.

In other words, government computers will look at the CPI-W figure for July, August, and September. They will average the increase for these three months. That will be the January 2023 COLA increase. This does not mean inflation for the previous months is not relevant. Inflation data continues to accumulate and will be reflected in a higher average.

Last month, according to the Senior Citizens League, the predicted COLA for 2023 was projected to be 8.9%—a staggering three percent higher than it was in 2022.

Obviously, inflation is still going up. The 8.9% figure is now probably too low. Earlier this year, the group predicted a 2023 COLA increase of 7.6%.

The continuing rise in inflation continues to raise estimates for the final figure. It still provides readers with where we now stand and an approximate idea of what will happen in January payments with the new COLA amount.

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