Inflation has become a huge threat to consumers, and retirees living on fixed incomes are among the most vulnerable to rising prices. When you have to pay more for everything, your budget can get stretched to the limit or beyond, leaving you with impossible choices.

For those who receive Social Security, however, there's some consolation in the fact that the program offers inflation adjustments on an annual basis. After seeing a 5.9% boost at the beginning of this year, even higher rates of inflation so far in 2022 have made it almost certain that the cost of living adjustment (COLA) that will kick in at the beginning of 2023 will be much higher. Indeed, a boost of 10% could still be in the cards, although it would take some renewed inflationary pressures to get there.

A Social Security card with George Washington's image from the dollar bill across it and two people talking in the foreground.

Image source: Getty Images.

Prices soared in the first half of 2022

To determine annual COLAs, the Social Security Administration looks at a measure of inflation called the CPI-W. That measure saw a huge acceleration in its advance in the first half of 2022, rising 6.8% between December 2021 and June 2022. If inflation had remained at that pace, it seemed as though a double-digit COLA for Social Security was all but assured.

However, the key months for measuring Social Security's COLA are July, August, and September. The July inflation report showed a slight 0.1% drop in the CPI-W, which brought its year-over-year gain to 9.1%. Relief came largely from falling gasoline prices, other energy-related costs, and additional areas that had seen huge advances reversed lower, including airfares and used cars.

How the COLA could top 10%

July's figures are only a piece of the puzzle for determining how much extra money Social Security recipients will get come January. The SSA will take the average of the July, August, and September figures and compare it to the average for the same months last year. That number from 2021 is 268.421, so July's reading of 292.219 represents an 8.9% rise.

If inflation remains tame with the CPI-W staying flat over August and September, that 8.9% figure will turn out to be the COLA that takes effect at the beginning of 2023. Even that number would be the largest boost for Social Security recipients in decades.

It would take big spikes in inflation for the COLA to reach the 10% threshold. It'd take an average of 295.263 from July to September to reach a 10% COLA, and that, in turn, would take month-over-month increases topping 1% in both August and September.

What's more likely to happen is the CPI will maintain more modest increases. That would likely produce a boost of 9% or more to next year's monthly Social Security payments without quite reaching double-digit percentage growth.

Are COLAs coming too late?

The problem with how the SSA does adjustments to reflect higher costs of living is that they only come retroactively. Social Security recipients have had to make it through the current period of higher costs right now, without the benefit of any immediate boost to their monthly checks. Only come January will those folks get the larger checks that many really need now.

Moreover, there's controversy about whether the COLA truly reflects the costs that most of those old enough to collect Social Security actually have to pay. The CPI-W is an index for workers, whose needs for goods and services differ from retirees who no longer have work-related expenses. Soaring gasoline prices impact seniors who spend considerable time traveling, for instance, more than those who have short work-related commutes.

In the next couple of months, we'll know just how big the Social Security COLA for 2023 will be. It might fall short of 10%, but seniors will be happy for every extra penny they get to fight the higher costs they've been facing all year.