2022 inflation was the highest we have seen in the United States in about 40 years which led to the highest COLA in 2023 for federal retirees in as many years.
Highest COLAs in 40 Years
For 2023, the COLA payments starting this month are up 8.7%. That was the highest COLA 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 reduce the historic increase in inflation rates.
The year before, in 2022, the annual COLA increase was 5.9%. At the time, that was the highest increase since July 1982.
There was a different COLA system used at that time. In 1982, the COLA was 7.4%. For those with an eye on history, President Carter left office in 1981. The largest COLA was in 1980 when he was still in office. In that year, the COLA hit 14.3%.
Previously, the highest COLA in recent years was in 2009 when it was 5.8%. The second-highest reading was 4.1% in 2005. The 2023 COLA of 8.7% now occupies the number one position for the highest COLA in recent memory.
The reality is that the 2024 COLA payments will not be anywhere near the 8.7% range.
Core Inflation Going Up
The most widely cited inflation category was up 6.5% year over year. This is a decline from an inflation rate of 7.1% in the previous month. This is the figure readers will see in most news reports.
The rate of “core goods” inflation is up 5.7% in one year. This is the index for all items less food and energy. It went up 0.3% in December, following a 0.2% increase in November.
There has been an increase in the supply of many products and the demand for these products has subsided in recent months. This has reduced the inflation rate for some items. The core inflation index is still high due to a hot jobs market and rising labor costs. Businesses are increasing wages in an attempt to attract more job applicants and to keep current employees on the job.
2023 Federal Employee Pay Raise Averaged 4.6%
Some federal employees did better than that. Here are the GS locality pay areas with the highest pay raises in 2023.
As many readers have commented, the 8.7% COLA for 2023 exceeded the average pay raise. In fact, the COLA percentage increase was higher than any of the locality pay areas.
|Locality Area||Percentage Pay Increase|
2024 COLA Will Be Lower: Will 2024 COLA Payments Match Inflation Rate?
While no one knows what the inflation rate will be later this year, there is little doubt that the 2024 cost of living adjustment (COLA) will be less than the 2023 rate of 8.7%. The Federal Reserve is hoping to bring inflation down to 2% during the summer. While that may not be achievable, it is likely the rate of inflation will be down in the 3-4% range later in the year.
The rate of inflation will not necessarily be matched by the 2024 COLA—in fact, that is unlikely to happen.
The inflation rate is calculated on a year-to-year basis by looking at the past 12 months. The COLA calculation is different. That worked out to the benefit of Social Security recipients and for those receiving a federal annuity. This difference is why the 2023 COLA (8.7%) was higher than the rate of inflation (6.5%). (See What’s the Difference in the Annual COLA and Pay Raise?)
Here is how your 2024 COLA payment will be calculated.
How is the 2024 COLA Calculated?
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 (2022).
- The average reading from the third quarter of the current year (2023) is compared to the figure from the third quarter of 2022.
- If the average CPI-W reading goes up in 2023, then the difference, rounded to the nearest 0.1%, is what beneficiaries will receive as an increase in 2024.
- If the figure is lower— indicating deflation—no adjustment is made. That happened several times under the Obama administration.
Because it now appears likely inflation will go down during the year when the COLA is actually calculated, inflation will be lower later in the year than it will be earlier in the year. That worked out well for retirees who start to receive a significant increase in their checks in January 2023. It is highly unlikely to be repeated again next year.
While it is too early to know what will happen with a calculation as complex as the annual COLA this far in advance, a projection of about 3% seems reasonable.
According to one projection, employers in the U.S. plan to raise salaries an average of 4.6% in 2023, up from an average of 4.2% in 2022. That data does not make the average federal pay raise look so bad. To fund the higher pay raise, private-sector employers are likely to be limiting benefits and perks.
Frequently Asked Questions
Why are the rates for a COLA and a federal pay raise different?
The calculations for the annual COLA and a federal pay raise are completely different. This article explains the differences.
What is the highest COLA percentage in recent years?
The 2023 COLA calculation of 8.7% (for the 2024 COLA) was the highest the COLA has been since the 1980’s.
When will the 2024 COLA be announced?
The percentage for the 2024 COLA will be announced in October 2023.