Core Inflation is Up But Index for Next COLA is Down

In October, when the inflation rate for the third quarter of 2023 was released, those who had a financial interest in the COLA increase for Social Security and federal annuity payments learned the 2024 cost of living adjustment (COLA) for federal retirees would be 3.2%. 

Retired federal employees under FERS will receive a 2.2% increase in their annuity payments. The Social Security payments for FERS retirees will still receive the full increase.

November 2023 CPI Highlights

The Consumer Price Index for November was released on December 12th. Here are the highlights of this report:

• The U.S. consumer price index rose 0.1% in November. This was above the projected increase.
• Core CPI – which is minus food and energy – was up 0.3% in November after going up 0.2% in October. The Federal Reserve views the core rate as a better predictor of future inflation trends and it is three times higher than the overall index.
• The 12-month rise in CPI slowed to 3.1% in November from last month’s increase of 3.2%.
• Inflation is still going up but the rate of the increase is lower.
• The increase in core CPI in the past 12 months is unchanged at 4.0%.
• For November, the CPI-W index decreased by 0.3 percent.

Core Inflation is Up; CPI-W is Down

For those who may hope for a larger monthly check as a result of the next cost of living adjustment, the CPI-W index is the index used to calculate the 2025 COLA. The calculation for the 2025 COLA will become available in mid-October 2024.

For the large number of those with an economic interest in the annual COLA, note that the core inflation rate is higher but the CPI-W index went down. Stated differently, this means that prices are still going up while the inflation index for the COLA calculations went down.

While there are still ten months to go before the next COLA figures are released, the data so far points to a lower COLA next year. Realistically, a lot will happen over the next few months and some of these events are likely to have a bigger impact on the next COLA than what has occurred so far.

What Will the Latest CPI Report Do for Interest Rates?

The November CPI report will strengthen the view that the Federal Reserve will leave interest rates alone after its last significant meeting for 2024. Most reports suggest the Federal Reserve has raised rates high enough to tamp down inflation and return it to the level of interest rates before the COVID-19 pandemic without creating a significant recession.

Housing costs are still high. Inflation may slow as this cost figure goes down. At the moment, the cost of housing may be killing the American dream for many. Here is a summary from the Wall Street Journal:

Homeownership has become a pipe dream for more Americans, even those who could afford to buy just a few years ago.

Many would-be buyers were already feeling stretched thin by home prices that shot quickly higher in the pandemic, but at least mortgage rates were low. Now that they are high, many people are just giving up.

Stock Prices are Up for the Month and in 2023

A key factor in ensuring retired federal employees will have an income to maintain their standard of living will often be the Thrift Savings Plan (TSP).

While some decry the level of salaries paid to federal employees, two big advantages of working for Uncle Sam are the defined annuity provided by FERS along with Social Security payments after retirement and government contributions for an individual into the Thrift Savings Plan. The TSP is one of the most popular federal employee benefits and a number of federal employees have accumulated more than one million dollars in these accounts.

Despite the continuing impact of inflation on prices and the pressure the increase in prices puts on purchasing power, the value of the TSP stock funds is increasing.

Here is how the TSP’s core funds have performed so far in November and so far in 2023. These data are as of the close of the stock market on December 11, 2023.