Inflation, 2023 Federal Pay Raise, and Declining Wealth As 2022 Winds Down

While the anticipated 2023 federal pay raise is 4.6%, on average, inflation has slowed to an annual increase of 7.1%.

The Consumer Price Index (CPI) for November is now out. While this event gathered relatively little interest for a few years, under the Biden administration it has assumed a new level of interest as inflation has been raging. This will have a significant impact on the 2023 federal pay raise.

The good news this month is that the “all-items index” only increased 7.1 percent for the 12 months ending November. While that is still very high inflation, it is good news as it is less than the rate of inflation has been in recent months.

This is the fifth-straight month of inflation rate declines. This indicates that the rise in interest rates imposed by the Federal Reserve is probably having the desired effect.

This was the smallest 12-month increase in inflation since the period ending December 2021. The all items less food and energy index rose 6.0 percent over the last 12 months. The energy index increased 13.1 percent for the 12 months ending November, and the food index increased 10.6 percent over the last year. While these are still very high inflation figures, the increases were smaller than for the period ending in October.

Inflation for the CPI-W

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 7.1% over the last 12 months. This index is often of the most interest to readers as it is this index that eventually determines the next cost of living adjustment (COLA) for Social Security and federal retirees.

The 2023 COLA is already in place and those entitled to receive the increase will see larger payments in January. The COLA increase is always based on data from earlier in the year. Future increases will not be tallied until October of 2023 for the 2024 COLA calculation.

For 2023, the COLA will be 8.7%. That was the highest amount since 1981. No doubt, the 2024 COLA will be less than 2023’s 8.7% COLA as the Federal Reserve continues to raise interest rates in an attempt to dampen inflation.

The Federal Reserve has raised its benchmark interest rate this year at the fastest pace since the early 1980s. On Wednesday, it is likely to announce an 0.5 percentage point increase. this would bring interest rates to between 4.25% and 4.5%—the highest level since December 2007. 

Rising Interest Rates, 2023 Federal Pay Raise, Stock Market Decline, and $7 Trillion in Wealth Lost

The bear market in stocks and rising interest rates have destroyed the collective wealth of many Americans. American households lost about $6.8 trillion in wealth over the first three quarters of 2022. That is the decline in bank accounts, investments, and home values.

The loss in real wealth from January through September was about twice as large as the nominal loss — $13.5 trillion in current dollars—after accounting for the rapid inflation experienced this year. Inflation makes both debts and liabilities worth less in terms of purchasing power.

Inflation is still high and has spread to more labor-intensive areas of the economy. With a tight labor market, as wages surged as the demand for workers is greater than the number of unemployed people looking for work.

For the federal workforce, the anticipated 2023 federal pay raise is 4.6%, including 0.5% to be added in for locality pay increases. This means there will probably be a base pay raise of 4.1% and 0.5% added in for a locality increase. The amount of the increase will vary between each locality as it usually does.

For some in the federal workforce, there may be an additional amount added into their 2024 pay raise. The Federal Salary Council has recommended adding 16,000 federal employees to the GS locality pay system. The pay raise would be small, if this recommendation is implemented for 2023, but could be significant over time.

Declining Value from Lackluster TSP Performance

At the close of the stock market on December 12th, here is how the performance of the core funds in the Thrift Savings Plan (TSP) have fared so far this year:

G Fund0.13%2.78%
F Fund0.88%-11.48%
C Fund-2.15%-14.97%
S Fund-3.12%-23.55%
I Fund-0.56%-12.81%

While we can anticipate the stock market will go up again after today’s interest rate news, the 2023 investment environment has not been good for investors’ balance sheets. Inflation is obviously a big part of this scenario as it has impacted the purchasing power of every one of us as well as depressed the underlying value of stocks during the year.

Frequently Asked Questions About COLA and Inflation

What is a COLA?

A cost-of-living adjustment (COLA) is an annual increase made to Social Security and federal employee pension payments to counteract the effects of rising prices in the economy.

COLAs are typically equal to the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for a specific period. The Consumer Price Index (CPI) represents the average prices of a basket of goods and is used to measure inflation.

How is the annual COLA Calculated?

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.

If the average CPI-W reading goes up in 2022, then the difference, rounded to the nearest 0.1%, is what beneficiaries will receive as an increase in 2022.

If the figure is lower— indicating deflation—no adjustment is made. 

What is Inflation?

Inflation is an increase in prices. This increase is translated into a decline of purchasing power over time. The decline in value of the purchasing power of a dollar drops is reflected in the average price increase of a basket of selected goods and services over time.

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