May 2023 Inflation Report
The official report on inflation for May has been released. According to the Bureau of Labor Statistics (BLS), the Consumer Price Index for All Urban Consumers (CPI-U) went up 0.1% in May. Over the last 12 months, the all-items index has increased 4.0%.
The index for shelter was the most significant monthly contributor to this inflation index, rising by 8% last month. The index for food at home rose 0.1% during the month while the index for food away from home rose 0.5%. The energy index, in contrast, declined 3.6% in May.
2023 COLA Highest in 40 Years: Calculating the CPI-W Index for 2024
For many readers, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the most important inflation index. This is because the CPI-W index is the one that is used to calculate the annual cost of living adjustment (COLA) for federal retirement and for Social Security. This index increased by 3.6% over the last 12 months.
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.
The CPI-W figure for May 2023 was 298.382. The index is now about 2.2% higher than the average CPI-W for the third quarter of 2022.
Inflation led to the highest cost-of-living adjustment in 40 years for Social Security beneficiaries this year, with checks increasing by 8.7%. But with inflation receding, the COLA could be less than half of that for the coming year. Last month, the Senior Citizens League estimated the next COLA would be 3.1% and could finish up at 2% or less depending on what happens with inflation in the next three months.
If the forecast is correct, 2024 will see the lowest COLA in three years. The COLA in 2022 was a 5.9% increase, and it was 8.7% last year.
Last year, federal retirees received one of their most significant “raises” in several decades with the annual COLA coming in at 8.7%. That will not happen this year.
Comparing 2024 COLA With the Past Decade
It’s too soon to know the exact amount of the next COLA increase.
While we will not know the final calculation until October, the 2024 COLA payment for next year could end up being below 2%. That is a pessimistic scenario (depending on individual perspective). This would mean the approximate value of the COLA adjustments would be returning to what COLAs looked like for most of the last decade—before the 5.9% and 8.7% increases resulting from very high inflation for the past two years.
The reality is that a lower COLA is often better news for retirees because inflation is lower. The loss of purchasing power is more difficult to calculate, but it is often more harmful to retirees during their retirement years than to current federal employees. Current employees may receive a promotion or have other increases in their income that retirees do not have unless they take on another job for extra income.
For FedSmith readers, several data points are important to their economic security. The Bureau of Labor Statistics calculates the annual inflation rate. The annual COLA increase is based on a formula using the CPI-W index as described above. The amount of the annual federal pay raise is determined each year through the political process depending on actions or decisions by the president and Congress.
Here is how these data points compare from 2010 through 2022. For those who may not be familiar with each of these calculations, note that there are years when the federal pay raise may be zero. It is also possible for the annual COLA to be zero. The lack of a COLA or a pay raise does not often happen in the same year as this chart illustrates.
Note also that the annual pay raise figure is limited to current federal employees’ final annual pay raise. The actual amount of a pay increase varies for each federal employee as the pay raise does not include other changes in the average annual federal employee pay, including other figures such as promotions, within-grade increases, etc.
|Year||Pay Raise %||COLA %||Annual Inflation %|