After months of anticipation, Social Security retirees will soon know how the cost of living adjustment (COLA) will shake out for 2023. The COLA is expected to result in the largest increase in Social Security benefits in decades, largely because the calculation is based on inflation, which has been at some of the highest levels in 40 years. The Social Security Administration (SSA) is expected to announce the COLA hike on Oct. 13, but before that can happen, there will be another big announcement.
September inflation data
The SSA calculates the following year’s COLA by looking at the consumer price index for urban wage earners and white-collar workers (CPI-W). Specifically, the SSA looks at CPI-W data for the third quarter of the year, including July, August and September. The SSA takes the average of the CPI-W number for these three months and then compares it to the average CPI-W numbers for the third quarter of the previous year. The percentage difference is the COLA increase for the following year.
For 2022, the COLA increase was 5.9%, which is the biggest jump in many years. For 2023, the COLA increase is expected to be even greater. The CPI-W figures for July and August are already in – the CPI-W average in these two months was 291,924. In 2021, the CPI-W average was 268,088. This means that the CPI-W has increased by 8.89% in these two months.
That’s nearly 3% higher than this year’s COLA increase, but it’s not official yet because September’s CPI-W numbers won’t be released until sometime in the first half of October.
It’s hard to say exactly what that September issue will be. Economists had predicted that inflation would fall into August from July and rise 8% year-over-year based on consumer price figures for all urban consumers (CPI-U). But inflation actually picked up slightly in August, rising 8.3% year over year. While energy prices continued to fall, prices for housing, including rent, remained high.
But I’m still inclined to believe that inflation will start to fall more as the year goes on. While the Fed rate hikes are significant, they are still fairly new and need time to work their way through the economy.
Meanwhile, inflation expectations for next year continue to fall. According to a closely monitored study from the University of Michigan, which measures inflation projections for one year, recent data from this month shows that respondents expect inflation to fall to 4.6% over the next 12 months. That is the lowest figure since September 2021.
Where the COLA Adjustment Can Land
September’s inflation data provides Social Security retirees with the final piece of the puzzle they need to calculate the COLA adjustment for 2023. Given that I expect inflation data to be lower than August, the final COLA figure is likely to fall from the nearly 8.9% current figure that would imply. But I still expect the final COLA adjustment to be over 8% and that would still be a significant increase for 2023.