The Bureau of Labor Statistics (BLS) has issued its latest inflation report reflecting the January inflation rate.
Inflation has been a big factor in the American economy over the past two years. It impacts all of us. It impacts our standard of living. It can also influence or determine election results. As a result, it is important to everyone for different reasons.
This chart displays the CPI inflation rate and highlights why inflation has been newsworthy. Obviously, the yearly inflation rate for 2023 will not be known yet, but as of the end of February 2023 it is 6% over the past 12 months.
The coming months are already unfolding in ways that have not been widely predicted. The Federal Reserve has been trying to bring down inflation by raising interest rates. That often works and brings about a decline in interest rates. But, raising rates can have unpredictable results. As noted by the Wall Street Journal “…the Federal Reserve raises interest rates until something breaks. A big surprise over the past year had been that nothing broke.”
This week, something broke.
There have not been many obvious effects of the rise in interest rates other than the standard of living for most Americans declining.
The Silicon Valley Bank, the 16th largest bank in the United States, was the highlight of the second-worst banking collapse in US history. In a nutshell, the groundwork for this event occurred when the covid stimulus package added $5 trillion or so into the economy. This amount of money impacted the American economy.
At Silicon Valley Bank, deposits from customers tripled in a short time. The bank invested in long-term government bonds and Treasury bills at a time when interest rates were very low. When interest rates skyrocketed, bond prices dropped and the bank collapsed.
What does the Federal Reserve do now? It is facing the strong possibility of a financial crisis and continuing high inflation. Which is more important? How should the Federal Reserve react?
We will see how this economic quagmire plays out in the coming months.
Inflation in February 2023
The inflation rate for February is now available. In the last 12 months, the overall inflation index went up 6.0 percent.
The cost of housing was the largest contributor to the monthly all-items increase. Indexes for food, recreation, and household furnishings and operations are also contributing to higher expenses for American families. The food index increased 0.4 percent over the month with the food at home index rising 0.3 percent.
The increase was 6.4% in January. As noted above, the lower inflation rate may impact the Federal Reserve as it considers its next interest rate move while confronting a continuing increase in prices and bank failures that have occurred this week.
Inflation and the Annual COLA Increase
For FedSmith readers who have retired or are contemplating retirement, the inflation index of the most interest is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is the index that ultimately determines the amount of the COLA that will be paid in 2024.
The latest index figures for this category are up 5.8 percent over the last 12 months.
The CPI-W figure for February 2023 was up 1.08% more than the average CPI-W for the third quarter of 2022. The annual COLA percentage that will be announced in mid-October 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.
The 2022 inflation rate was 6.5% at the end of the year. The COLA for 2023 was 8.7%. The largest COLA increase in the past few decades was in 1980 when it was 14.3%. The 2023 COLA increase was the largest COLA payment since 1981 when it was 11.2%.
2024 Federal Employee Pay Raise and the Annual COLA
We do not know what the COLA will be for 2024. It is likely to be considerably less than last year’s 8.7% figure. With the recent turmoil in the financial system with two bank failures and an announcement that other banks have substantial losses, the economic turmoil may spread with a ripple effect that will have a substantial impact on the economy.
If the Federal Reserve becomes less aggressive on inflation and the financial crisis passes quickly, inflation could start going up again. If banks face a loss of uninsured deposits from companies, obtaining credit will become more difficult. Small and midsize businesses that are major employers would be heavily impacted.
The 2024 federal pay raise is likely to be 5.2%. That could easily change. This was the amount proposed by the president recently. That is often the final amount unless Congress decides to pass a bill with a different amount.
The 5.2% figure is an average raise. If that is the final figure to be enacted, some federal employees would get more than this and some would get less. The federal pay raise typically includes one amount for an across-the-board pay raise and another amount allocated for locality pay.
Because locality pay rates vary by region, the final amount of the pay raise is different when locality pay is applied. In 2023 for instance, the pay raise was a base pay increase of 4.1% and an average increase to locality pay 0f 0.5%. This resulted in an overall average 2023 federal pay raise of 4.6%.
Looking Forward into 2024
2023 started off on a favorable footing. TSP stock fund prices were up, inflation started to come down and there was a basis for optimism in the coming months. As noted in an article on TSP returns for January: according to the Wall Street Journal, “another change has started occurring in stock markets in January 2023. There is a return to normal among investors as to what events impact stock prices.”
But, as often happens, reality is always with us. Concerns about the national debt, government spending, the impact of inflation on stocks, the impact of these factors on the standard of living for all Americans, and the continuing possibility of an expanding war in Ukraine are still with us.
The only certainty is more breaking news will bring new results. Negative news in the daily cycle often leads to more positive results than anticipated.