New inflation data for August sent the market lower earlier this week, with Dow Jones Industrial Average It gave up a staggering 1,250 points on Tuesday as inflation came in higher than expected last month.
Inflation data doesn’t just affect the markets; It also plays a big role in determining how much to increase Social Security benefits in the coming year. Due to rising inflation, retirees are preparing to receive one of the largest increases in their 2023 benefits in decades.
While we don’t know that exact amount just yet, here’s where things stand after the latest August inflation data.
Living Adjustment Cost
Each year, the Social Security Administration (SSA) factorises the cost of living adjustment (COLA) to account for inflation. The idea is that if the cost of living goes up, it should go up too social Security So that pensioners do not lose purchasing power.
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COLA is calculated by looking at the consumer price index for urban wage earners and clerical workers (CPI-W) in the third quarter of the year during the months of July, August, and September.
The SSA then takes the average CPI-W for these months and stacks it against the average CPI-W in the third quarter of the prior year. The percentage increase in CPI-W from the previous year became the COLA increase for the following year. In 2021, the CPI-W was up 5.9% from 2020, which was a significant increase on its own.
This year, with prices for everything from rent to Medicare services to food soaring, inflation hit its highest level in 40 years. This means that the COLA increase for 2023 is likely to be greater than it was this year. Although inflation data for September is not available yet, we now have CPI-W numbers from July and August, which enables us to calculate what the COLA increase will depend on for those two months.
In July and August of this year, the average CPI-W was 291,924. In July and August last year, the CPI-W averaged 268,088. This means that over these two months, the CPI has risen by 8.89% this year.
What will happen in September?
Inflation has been hard to predict this year, so it’s hard to guess what will happen in September. And while the inflation rate rose slightly between July and August, the annual figure remained lower in August. I am now more likely to guess that we will see a drop in inflation in September.
The Federal Reserve raised its overnight lending rate, the federal funds rate, by three-quarters of a percentage point at its June and July meetings, and a similar hike is now expected at the Fed’s next meeting this month. While these price hikes are intense, they will take time to work their way through the economy, and there’s a good chance that even the June rally hasn’t seeped fully into the economy.
If inflation drops and there is another drop in CPI in September, this will result in COLA falling slightly below the figure of 8.89%. But whatever happens in September, I still doubt that the COLA adjustment for 2023 will be above 8%, which it will still be The largest increase in COLA It has been seen for decades.
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