Predictions for 2024 COLA
The slow-falling inflation rate is good news for many American consumers. A lower inflation rate will, of course, lead to a much smaller cost-of-living adjustment (COLA) than the 8.7% in 2023. One 2024 COLA prediction is that it will be about 3% and could be as low as 2% when the final inflation figures are tallied.
That estimate is from the Senior Citizens League. The Senior Citizens League is a nonpartisan advocacy group. That 2024 COLA prediction is based on the inflation figures released in March. If the 2024 COLA does go below 2%, it would be the smallest adjustment since 2020.
CPI-W Inflation Rate for March
The COLA that will be seen in retirement checks for Social Security and federal retirees starting in January 2024 is based on an index called the CPI-W. The full name is the Consumer Price Index for Urban Wage Earners and Clerical Workers.
This index has increased 4.5% over the last 12 months. For March, the index increased 0.3%.
The annual COLA rate is calculated by comparing the average inflation rate for the third quarter of the year (July, August, and September). In other words, the annual COLA increase is determined 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.
If there is no change, which has happened in some years, the COLA for the coming year is zero.
The CPI-W figure for March 2023 was 296.021, 1.4% higher than the average CPI-W for the third quarter of 2022, which was 291.901.
The closer we get to the third quarter, the more accurate the COLA 2024 projections will become.
Overall Inflation Rate: Dropping But Still High
The Consumer Price Index for All Urban Consumers (CPI-U) is the index used to generally report the inflation rate in our country. For March, this index went up 0.1% after increasing 0.4 percent in February.
The all-items index increased 5.0% for the 12 months ending March. This was the smallest 12-month increase since the period ending May 2021.
Inflation is still high and considerably above the target set by the Federal Reserve which has a target inflation rate of 2%. Inflation is still much higher than the 2.1% average in the three years before the pandemic.
Looking at specifics, the all-items index, less food, and energy went up 5.6% over the last 12 months. The energy index decreased 6.4% for the 12 months ending March, and the food index increased 8.5% over the last year.
Interest Rates Likely to Go Higher
The result is that the Federal Reserve will likely continue raising interest rates. The Fed has raised interest rates nine times over the past year. This is an attempt to cool the economy and tame inflation, which went up substantially as the federal government injected large amounts of money into the economy, and the economy started to rebound from the pandemic despite supply-chain problems and a shortage of workers.
For most Americans, the most important aspect of inflation is the cost of what we have to spend to try to maintain the same standard of living. For most, that is not possible when wage growth consistently is less than inflation and prices for the most important products and services go up the most.
For current federal employees, last year’s raise of 4.6% was obviously considerably below the official rate of inflation. It is possible that the 2024 pay raise, which is likely to be 5.2%, may turn out to be above the final inflation rate.
As the increase for federal retirees was higher for those who received the full COLA, the sting of inflation was a little less than it would have been. For most retirees, the items that are included in the inflation rate do not reflect the items of the most relevance to older Americans.
The good news for most federal employees is that the actual pay increase over time often exceeds the official pay raise amount. This is probably due to within-grade increases, grade creep, and promotions. During years of high inflation, as we have had the past two years, the inflation rate may still be higher than the reality of pay increases though.