The latest inflation data reflecting data for June was released by the Bureau of Labor Statistics (BLS) on July 12th.
Inflation Cools But Standard of Living Still Going Down
Inflation showed signs of slowing down in June. Core prices are still showing inflationary pressure that still impacts all of us and our standard of living as prices go up faster than wages.
Here is the summary from BLS: Consumer Price Index for All Urban Consumers (CPI-U) went up 0.2 in June after increasing 0.1% in May. Over the last 12 months, the all items index increased 3.0% before seasonal adjustment.
The index for shelter was the largest contributor to the monthly all items increase, accounting for over 70% of the increase, with the index for motor vehicle insurance also contributing.
The food index increased 0.1% in June after increasing 0.2% last month. The index for food at home was unchanged. The index for food away from home went up 0.4% in June.
From the image at the top of this article, readers can see the impact inflation has had on major expense categories. For those who eat at home, expenses are up 5.7% in the last 12 months, and this presumably impacts all of us. The cost of shelter is up 7.8%.
Latest Data for 2024 COLA
For many readers, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the most important index for measuring inflation. This is because the CPI-W index is the one 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. For the month, 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.
The CPI-W figure for June 2023 was 299.394. The index is now about 2.6% higher than the average CPI-W for the third quarter of 2022.
Despite the relative slowing of inflation, we are still feeling the impact of the rapid inflation that occurred last year. Inflation led to the highest cost-of-living adjustment in 40 years for Social Security beneficiaries with checks for COLA payments and Social Security generally increasing by 8.7%.
With inflation receding, the COLA and Social Security payments starting in January 2024 could be much less than the most recent increase. Next year’s COLA increase could be as low as 2% or less. If the fiscal 2024 COLA does drop below 2%, it would be the smallest adjustment since 2020.
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.
Although inflation has gone down from a peak of 9.1%, it is still higher than the Federal Reserve’s 2% target rate.
Stock Prices and Inflation
The value of your Thrift Savings Plan (TSP) may go up or down in a year and inflation can be a factor in how stocks perform.
The chart above shows how the TSP prices for the TSP core funds have fared so far in July and for the year to date. Investors are also wary of how the Federal Reserve will react to the latest economic data when deciding whether to continue raising interest rates.
Many stock market investors started this year with a pessimistic forecast for the stock market and economy. Many investors could see an economic recession as a near certainty.
While a recession is still a possibility depending on world events, investors are often coming around to the view that our economy will avoid a downturn. With the latest inflation data showing inflation cooling, there has been a least a short-term jump in the stock market after the data were released.
If the economic news continues to be favorable, former federal employees who are now retired (or those nearing retirement) may enjoy a year with lower inflation and increasing value in their TSP investments. No doubt, some will be disappointed with a lower COLA. The reality is that a higher COLA really means purchasing power is declining, even with the COLA increase.
It is possible 2023 could provide better economic news than many were expecting.