Just how huge will your Social Security cost-of-living adjustment (COLA) for 2023 be? Some predict the increase will approach 11%. Others say it will be closer to 10%. 

But it could be prudent to adhere to the old adage about not counting your chickens before they hatch. Here's why your Social Security increase might be lower than many expect.

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The third quarter is the charm

COLAs are intended to help Social Security benefits keep up with inflation. But there are some details about how the Social Security Administration (SSA) determines the exact amount of COLAs that are important to understand. 

First, the SSA doesn't use the Consumer Price Index (CPI) that you hear about most often in the news. The official name of this measurement is the Consumer Price Index for All Urban Consumers (CPI-U). The SSA, though, uses a different metric known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The full names of these two indexes reveal their main difference. The CPI-U attempts to track price changes for urban consumers, while the CPI-W attempts to track price changes for urban workers. As you might expect, the metrics tend to move in lockstep but don't exactly match up. 

Perhaps the most important thing to know about how COLAs are calculated is that the SSA only uses the average CPI-W numbers for the third quarter of the current and previous years. It doesn't matter how much inflation might soar earlier in the year. Only Q3 matters.

Signs of a peak

That leads us to why your Social Security increase might not be as high as many expect. All of the predictions that have been made are based on the inflation we've seen in the U.S. so far in 2022. But there are signs that inflation has peaked and could come down in the third quarter.

The most obvious indication that inflation has peaked came with the July CPI numbers from the Bureau of Labor Statistics (BLS). After steadily rising month after month, the July CPI-U  remained the same as it was in June -- 8.5%. The July CPI-W even fell slightly from the previous month.

Gasoline prices dropped by 7.7% in July. This decline was enough to offset increases in food and housing prices. So far, this trend appears to be carrying over into August. Gas prices in the U.S. have been typically falling between $0.01 and $0.03 every day since mid-June, based on data from AAA. Some experts now predict that average prices of close to $3 per gallon could be on the way.

Transportation costs factor into the prices of many products. It's likely, therefore, that lower gas prices could lead to lower prices for food and other goods included in the CPI-W metric. 

Housing prices are also cooling off. Higher interest rates have slowed down new mortgages considerably. Sure, home prices continue to rise. In June, though, house prices increased at the slowest rate since the early 1970s, based on data from mortgage software and analytics company Black Knight.

Still huge

With all of these indications, it seems unlikely that the Social Security increase for 2023 will be as high as some of the earlier projections. However, even if inflation slows in the third quarter, it won't magically disappear.

Realistically, the lowest your COLA will be is probably somewhere in the ballpark of 7% to 8%. The low end of this range would still be the largest Social Security increase in 40 years. The COLA might not be as great as many expect, but it will almost certainly still be huge compared to most years.