According to the Bureau of Labor Statistics in the latest 2022 inflation update, inflation receded in July but remained close to the highest in four decades. Over the last 12 months, the all items index increased 8.5% compared to the 9.1% figure from the previous month.
The all items less food and energy index went up 5.9% over the last 12 months. The energy index increased 32.9% for the 12 months ending July, a smaller increase than the 41.6% increase for the period that ended in June.
The food index increased 10.9% over the last year, the largest 12-month increase since the period ending May 1979.
2022 Inflation and the CPI-W Index for a 2023 COLA
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the one of most interest to many federal retirees and Social Security recipients.
The CPI-W index is used to calculate the 2023 COLA payment that will start in January. This index measures increases in the prices of consumer goods. This category includes food and beverages, housing, clothing, transportation, medical care, recreation, and education.
This index is up 9.1% over the last 12 months. It is now at an index level of 292.219. For the month of July, the index went down 0.1%.
The CPI third quarter average for 2021 was 268.421. (The annual COLA is calculated 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.) This means that the increase over the third quarter average last year is 8.87%.
Last October, when 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. At that time, this was the largest COLA increase in 40 years.
The COLA for 2023 will certainly be larger than the 5.9% in 2022. The actual 2023 COLA will be calculated in mid-October. At that time, government computers will average the increase for July, August, and September. That will determine 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.
CPI-W vs. CPI-E for COLA Calculation
Looking back at previous COLA increases, the increase in 1981 was 11.2%. That followed a 14.3% increase in 1980. The pay raises in 1980 and 1981 were 9.1% and 4.8%, respectively.
Legislation has previously been introduced by Congressman John Larson (D-CT), chairman of the House Ways and Means Social Security Subcommittee, which will interest retirees. This legislation would adjust COLA payments by basing the annual adjustment on the consumer price index for the elderly (CPI-E). This is a different index that measures the cost increases that impact older Americans more than others.
The reality is that this legislation is being given a 3% chance of adoption by GovTrack.
The Senior Citizens League has urged the adoption of this index:
Currently, the COLA is based on a consumer price index (CPI) that reflects how young, urban workers tend to spend their money, called the CPI-W. However, older Americans spend a disproportionate share of their household budget on health care and the CPI-W fails to capture that. Since health care costs continue to rise so quickly – and since most health care spending cannot be substituted for something cheaper – TSCL believes that seniors would be better served if their COLA were based upon a consumer price index for elderly consumers, or the CPI-E.
The Government Accountability Office (GAO) has also weighed in on the accuracy of the CPI used to determine COLA amounts:
[T]he relative sample size used to calculate the expenditure weights for the CPI-W subpopulation has been shrinking in part because of declining response rates and demographic shifts away from the occupations included….”
The accuracy of the weighting used in the CPI-W “may be deteriorating” and BLS has not evaluated the accuracy of the data used in compiling the index since 1980.
Federal Reserve Efforts to Reduce Inflation Working
According to the American Automobile Association, the national average gas as of August 10, 2022 is $4.01. While the lower cost of gas is definitely a good sign and is being touted by the White House to support administration policies and to combat the fear of inflation, when President Biden was inaugurated the average price for a gallon of regular-grade gasoline was $2.39, according to AAA.
Despite steadily falling gas prices during the summer driving season, less gas is being sold. Americans are changing their driving habits to deal with higher gas prices.
Gasoline consumption is now at about the same level as it was during the COVID restrictions that were in effect in some places. The cost of oil has gone down based on concerns about economic slowdowns in the United States and in other countries. If gas usage remains low and the supply continues to increase along with falling oil prices, gas prices at pumps will continue to drop.
Of course, reduced gas consumption is also an indicator of slower economic activity. With the Federal Reserve continuing to raise interest rates, economic activity will predictably slow down.
The U.S. economy has now diminished in two consecutive quarters this year. This is a common definition of a recession, although those with their own interests will argue over the definition. For most Americans, it just means the value of their money has declined at a time when inflation is high and the economy is shrinking.
The rapid rise in inflation is impacting all Americans. The slight decline in inflation is good news even if it is still near a 40-year high. This time next month, COLA and Social Security recipients will have a better idea of what the 2023 COLA will look like as it will be the second month of the three-month period for calculating the COLA increase for 2023.