The coronavirus pandemic has put strain on everyone, but retirees have a lot more to worry about than others. Older people are at greater risk if they catch the COVID-19 disease, and they're also more likely to have financial challenges. Many retirees live on fixed incomes, with most or all of their money coming from Social Security.
Every year, Social Security recipients get cost of living adjustments designed to take changing prices for essential goods and services into account. Based on the plunge in oil prices during February, it seemed likely that falling energy costs would lead to a complete lack of inflation this year over 2019, which is what goes into the calculation of how much of an increase Social Security benefits see. Yet the most recent inflation data showed a countervailing force that's pushing prices higher -- and that could lead to a positive COLA for 2021 after all.
Falling prices -- but not everywhere
March's inflation numbers came out recently, and they largely reflected what most people had already expected. The core CPI number fell 0.4% in March compared to the previous month, the steepest drop in five years. The primary culprit was a 10.5% drop in the price index for gasoline, which sent overall energy costs down 5.8% for the month.
Other factors sent core inflation, which excludes volatile energy and food costs, down 0.1% for the month. Airline fares fell during the month, as did costs for hotels and other away-from-home lodging. Apparel and new vehicle costs were also down month over month.
However, the factor that offset some of these declines was food. The overall food index rose 0.3% in March, and the price of eating food at home -- which nearly everyone's doing right now under coronavirus restrictions -- was up 0.5% for the month. With people clamoring to stock up on essential items, prices have become less of a consideration for some shoppers, and that -- along with some shortages of certain items -- is helping to contribute to rising costs across the board.
Why the CPI matters to Social Security COLAs
Food, energy, and other costs are critical for Social Security recipients because they go into the calculations of annual COLAs. Specifically, a slightly different measure of inflation from what you generally see in news headlines establishes COLAs. The CPI-W was down 0.2% in March, seeing the same tug of war between rising food costs and falling energy prices.
As of now, the current CPI-W of 251.375 is 1.5% higher than it was a year ago. However, it's just 0.5% above the average level of the CPI-W from July to September 2019, which is what will eventually determine the Social Security COLA that will take effect at the beginning of 2021.
Heads they win, tails you lose
Many Social Security recipients will be happy if they get a COLA in 2021. However, the problem is that if food prices drive the COLA higher, it could end up costing those on Social Security more in extra expenses than they'd get from larger checks. Falling gasoline costs help younger workers in the middle of their careers more than they help older Americans, but everyone has to eat. If food costs rise at a faster pace than the overall inflation rate, then the COLA might be too little to help seniors keep up with their cost of living.
Energy prices are continuing to fall, with no clear relief in sight. That could still lead to a 0% Social Security COLA for 2021. But if food prices keep rising, then inflation at the dinner table could well deliver a positive COLA next year -- even if it does nothing to benefit Social Security recipients in terms of their true purchase power.