The Social Security Administration this week announced a 2.5-percent cost-of-living adjustment (COLA) for this year, a more modest increase in the national retirement and benefits plan that reflects easing inflation in the economy.
Last year, the increase was 3.2 percent. In 2022, the increase was 8.7 percent and in 2021 the increase was 5.9 percent. Those numbers are calculated with a formula based on the Labor Department’s Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The increases generally track the level of inflation in a given year. Right now, inflation in the September CPI-W is at a 2.25-percent annual increase. Last September, it was at a 3.56-percent annual increase, and in September 2022, it was at an 8.46-percent annual increase.
The specifics of the calculation are pegged to CPI-W averages recorded in BLS data from the third fiscal quarters.
As the Social Security Administration spells out, “a COLA effective for December of the current year is equal to the percentage increase (if any) in the CPI-W from the average for the third quarter of the current year to the average for the third quarter of the last year in which a COLA became effective.”
As the economy climbed over the hump of the post-pandemic inflation, Social Security COLAs increased in magnitude and then subsided, with annual price increases diminishing back toward the Federal Reserve’s target rate of 2 percent, at which overall inflation is barely noticeable to consumers.
The dip in inflation followed a precipitous rise in interest rates as well as a shedding of the Fed’s balance sheet but also likely involved transitory factors, including the renormalization of supply chains and the economic absorption of various types of stimulus.
With inflation down significantly, the Fed has begun cutting interest rates in an effort to spur growth and investment with cheaper interbank lending. These rates often don’t translate fully down to the level of consumer savings accounts, but they do undergird mortgage rates and other types of financing, offering a measure of relief for many consumers.
The economy may now be close to an inflection point, but it isn’t exactly clear. Sixty-one percent of business executives believe that a recession will occur within six months, according to a survey of executive sentiment released this week by accounting firm PwC. U.S. central bankers, on the other hand, are continuing to project confidence about the economy.
Recent U.S. economic data has been very strong, with 2nd-quarter GDP clocking in at 3-percent growth, the unemployment rate descending for the second straight month after jumping up over the summer, and inflation descending from 2.6 percent in August to 2.4 percent in September.
After sticking above 3 percent between the summers of 2023 and 2024, inflation in CPI has been descending continuously for the past six months.
