One of the best things about Social Security is that its payments are designed to keep up with inflation. Annual cost-of-living adjustments (COLAs) ensure that those receiving benefits get a boost to their monthly payments each January in order to preserve the benefit's purchasing power.
The size of the Social Security COLA in January 2023 was massive, adding 8.7% to the size of recipients' checks. Amid fears that falling inflation rates could leave seniors without any Social Security raise at all in 2024, the report that the Bureau of Labor Statistics just released Tuesday pointed toward the likelihood of at least some increase in benefits come next year.
A big jump in inflation rates
Inflation continued to calm down during the last two months of 2022, but the most recent monthly report on the Consumer Price Index showed a month-over-month uptick. In particular, the Urban Wage Earners and Clerical Workers variant of the CPI, also known as CPI-W, rose by 0.9% in January compared to December 2022. That brought the 12-month change in the CPI-W to 6.3%.
Image source: Getty Images.
As has been the case recently, volatile energy prices played a key role in the increase. The energy index in the CPI jumped 2% month over month, boosted by rising gasoline and natural gas prices. Yet even when you take out food and energy, the core CPI climbed 0.4%, suggesting an annual inflation rate well in excess of the Federal Reserve's target of 2%.
Why a no-COLA is now unlikely
We're still a long way off from when the Social Security Administration (SSA) will determine the COLA for 2024. The numbers that go into that calculation are the CPI-W readings for July, August, and September. When you average those readings, you get a baseline for the year. Compare it to the average CPI-W in those months from the previous year, and you get the percentage that will be the following year's COLA.
For example, to determine that the Social Security COLA for 2023 was 8.7%, take the average CPI-W number from July 2022 to September 2022, which was 291.901. Divide that by the average reading from July 2021 to September 2021 of 268.421, and you'll see that the percentages match up with the actual COLA amount. The Social Security Administration will use the same process in late 2023 to derive 2024's increase.
With January's 0.9% rise, the CPI-W now stands at 293.565. That's already enough to generate a 0.6% COLA in 2024 even if there's no further inflation at all over the next six to eight months. And if the CPI-W continues to gain ground in the months to come -- as it has in many years in the past -- then it'll set the stage for a healthier COLA at the beginning of next year.
What to look for
If you're interested in tracking Social Security COLAs for 2024, it pays to keep watching the monthly inflation readings as they come in. Even before the recent spike in inflation, it wasn't uncommon to see CPI-W figures rise 0.2% to 0.3% per month. Even if the trends revert toward slower price increases, inflation could still lift the CPI-W enough to support a 2% to 4% COLA.
Yet if stronger inflationary pressures come back, then the COLA for 2024 could be even larger. That would be a mixed bag for Social Security recipients because it would suggest that the prices of the goods and services they need would have gone up as well. Still, it would take a huge spike for 2024's COLA to come anywhere near 2023's 8.7% figure, and a smaller COLA than that would at least give economists another data point to support the idea that inflation is getting back under control.
