Big, gigantic, immense, formidable. Pick any of these adjectives, and you’ve probably seen it used to describe the upcoming Social Security Cost of Living Adjustment (COLA).
Some predict an increase of almost 11%. If that happened, it would be the third highest COLA in history.
Is a monster increase in Social Security really on the way? Not necessarily.
Count the chickens
You’ve probably heard the old expression of not counting your chickens before they hatch. The idea is that it is unwise to assume that something will happen before it actually happens. While it might be tempting to bet on a massive Social Security COLA, there’s no way to be sure just how big the increase will be.
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Yes, COLAs are intended to prevent Social Security benefits from being eroded by inflation. And yes, inflation so far in 2022 has been at levels not seen in four decades. Does that mean your COLA will automatically be higher than it has been for almost 40 years? Unfortunately no.
The reason for this is that COLAs are not calculated on inflation rates throughout the year. Only the averages for the third quarter of the current year and the previous year are used. In addition, the measure used to determine Social Security increases – the Consumer Price Index for Urban Wage and Clerical Workers, or CPI-W – differs slightly from that most often used to measure social security. inflation (the consumer price index for all consumers, or CPI-U).
Of course, no one knows what the average CPI-W will be for the third quarter of 2022 because the quarter is not over yet. We don’t even know what the CPI-W was for August at this point. The Bureau of Labor Statistics won’t release the data until September 13.
Change in the air
Certainly, if inflation (as measured by CPI-W) in the third quarter is as high as it has been in the first seven months of this year, your Social Security COLA will be quite large. A level of nearly 11% would be unlikely, but an approximate increase of 9% could be expected in this scenario.
However, there are many signs that inflation may already be falling. On the one hand, July’s CPI-W fell slightly compared to June’s level. More importantly, however, two of the main drivers of rising inflation appear to have run out of steam.
Gas prices have fallen significantly over the past two months. On June 14, 2022, the average US price for unleaded gasoline reached $5.02 per gallon. As of Sept. 8, the national average was $3.75 a gallon, according to AAA. That’s a 25% reduction. Some experts predict that gas prices could continue to fall.
Transportation costs impact the cost of many products, especially food. As gasoline prices fall, the prices of other goods are likely to fall as well.
In July, house prices fell from the previous month for the first time in three years. The decline was the largest since 2011. This trend looks set to continue. Fannie MaeThe recent National Housing Survey found that the number of Americans expecting house prices to fall soared in August.
Lower than some predict – but still significant
We won’t know what the actual COLA will be until mid-October. However, there seems to be a good chance that your Social Security increase will be less than many think.
Even with the possibility of inflation falling in the third quarter, the CPI-W average could still be much higher than the prior year period. Whether you call it a monster raise or not, Social Security recipients are almost certainly in store for a much bigger COLA than they’ve had in a long time.
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Keith Speights has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.