If you're a Social Security retiree, you're probably watching the inflation numbers like a hawk.

That's because Social Security benefits increase every year according to the COLA, or cost-of-living adjustment. And last week, the August inflation reading came in hotter than expected. The Consumer Price Index for All Urban Consumers (CPI-U), which is the inflation reading most closely followed by economists, rose 8.3% year over year, down from 8.5% in July but still higher than estimates of 8.1%. Also troubling was that core inflation, which excludes food and energy, remained elevated at 0.6% month over month and 6.3% year over year, showing that even prices for less volatile items like clothing or shelter are still rising quickly.

But Social Security's annual COLA is based on a different inflation measure, the CPI-W, or the Consumer Price Index for Urban Wage Earners and Clerical Workers. The CPI-W index was up an even higher 8.7% year over year in August.

For retirees, there's good news and bad in the hotter-than-expected inflation data. Here are the pros and cons for Social Security beneficiaries.

$100 bills with a Social Security card and a Treasury check.

Image source: Getty Images.

The good news: Social Security checks could jump more than 8% in 2023

There's only one more inflation reading until we know how much the 2023 Social Security COLA increase will be. The all-important September inflation reading will come out on Oct. 13, which means we're just a few weeks from knowing how much of a bump in benefits Social Security recipients will get. However, since the Social Security COLA is based on the third-quarter average increase in the CPI-W, we have a good sense of a how much it will be. After an 8.7% increase in August and a 9.1% uptick in July, retirees are on track for an 8.9% cost-of-living adjustment next year.

The good news then is that retirees will be getting their biggest Social Security increase in roughly 40 years. 

Since the average senior collects $1,661 a month in Social Security benefits, retirees are set to get an average COLA increase of $147 if the 8.9% estimate holds. That jump, coming after last year's 5.9% increase, will certainly be a help for food, gas, and rent bills.

The bad news: Costs are still rising rapidly

The flip side of the higher benefits coin is that retirees are still seeing their basic expenses increase quickly. Essential categories like food jumped 11.4% over the last year, and with the exception of energy and used vehicles, every line item in the August CPI report increased from July. Electricity costs, for example, are up 15.8% over the last year. Housing, the biggest expense for both retirees and working-age Americans, rose 0.7% from the previous month, the fastest increase in that category in at least seven months.

Retirees' biggest expenses, in order, are housing, transportation, healthcare, food, and utilities, and nearly all of those costs are still rising. Since the COLA increase won't be implemented until 2023, retirees will have little choice but to absorb those higher costs in the meantime.

The other challenge with persistent inflation is that it will motivate the Federal Reserve to continue aggressively hiking interest rates, making a recession and continued volatility in the stock market more likely. While higher interest rates are actually good news for retirees who collect interest on bank deposits, it's a problem for those counting on the stock market to grow their wealth. 

What it means for retirees

Once you've begun collecting Social Security, it's difficult to increase your benefits. In fact, the COLA is the most common reason for an increase in Social Security benefits after claiming, and unfortunately, the cost-of-living adjustment is out of your control.

But there are things you can do to stretch your savings. Consider working on your budgeting, investing in dividend stocks that will give you extra income, or getting a side hustle, especially one that's perfect for retirees

If you count on Social Security for income, there's no doubt you'll be paying attention to the inflation report on Oct. 13, but sky-high inflation should also be a wake-up call to retirees. With expenses continuing to rise the fastest they have in 40 years, Social Security shouldn't be your only source of income in retirement.