The inflation report for April shows that price pressures in America’s economy are still strong—despite the Federal Reserve’s aggressive interest rate hike campaign. Common products including gasoline, groceries, and rent went up 0.4% in April from March. These products went up more than the 0.1% increase recorded in March. How inflation fares in 2023 will ultimately dictate the 2024 COLA for retired federal employees.
Last week, the Federal Reserve raised its federal funds rate by an additional quarter percentage to a range of 5% and 5.25%. This rate is the highest it has been in 16 years. The impact of raising interest rates will slow economic activity and inflation but the impact is not immediate. There will be more of an impact reflected in this action in the May inflation report.
For the past 12 months, inflation is still up 4.9%. This is down from a high point of 9.1% last June.
These figures from the Bureau of Labor Statistics are based on the Consumer Price Index for All Urban Consumers (CPI-U).
What About the CPI-W Index?
The inflation index that is of most importance to federal employees who have retired is the CPI-W index. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the index that will ultimately determine the amount of the increase for those who receive a federal annuity or an annual COLA.
For retired federal employees under the FERS system, their annual annuity increase and the annual Social Security increase are both impacted by this inflation indicator. For April, the CPI-W increased 4.6% over the last 12 months. For the month, the index increased 0.6%.
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 April 2023 was 297.730, about 2% 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 predictions will become. Last month, the Senior Citizens League predicted an annual COLA increase of about 3% for 2024.
As noted in a previous FedSmith article, how inflation is calculated has changed over time. The concept of the CPI has moved away from measuring the cost of living needed to maintain a constant standard of living. The newer method of calculation measures the cost-of-living expenses rather than the rise in prices.
Comparing Annual Federal Employee Raise to COLA
Some readers have asked if the federal employee raise will be impacted by the inflation rate that is lower than last year.
Right now, the best guess for the 2024 pay raise is 5.2%. That may change depending on what happens in Congress between now and the end of the year. The impact of the inflation rate will only be indirect. The annual pay raise is a figure determined through the political process. The COLA percentage for the next year is an automatic calculation as explained above. The pay raise is not determined with an automatic calculation.
As a result, Congress could pass legislation raising the pay raise to more than 5.2% or it could eliminate any pay raise. In recent years, it has been more typical that Congress did not pass any legislation dictating a pay raise. Instead, the amount recommended by the president has gone into effect for the following year.