Inflation has been surging since 2021, and the Federal Reserve hasn't taken kindly to it. In 2022, the Fed raised interest rates seven times in an effort to slow the pace of inflation. And that made life more expensive for consumers at a time when costs were already higher.
While the Fed doesn't set consumer borrowing rates directly, it tends to indirectly drive up the cost of borrowing when it raises its benchmark interest rate. Meanwhile, in January, the Consumer Price Index (CPI) rose 0.5%, compared to December. That's a pretty notable month-to-month uptick and could be enough to spur an aggressive rate hike at the Fed's next meeting.
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All told, January's CPI report wasn't exactly loaded with great news. But there's one positive takeaway for seniors on Social Security.
2023's Social Security COLA might go really far
In January, Social Security recipients saw their monthly benefits increase 8.7% once their latest cost-of-living adjustment (COLA) was implemented. That 8.7% raise represents the largest increase in decades.
When that 8.7% COLA was announced this past October, the fear was that it wouldn't hold up to rampant inflation. But since that announcement, CPI readings have come in at under 8.7%, which means that seniors might actually have a chance to gain some buying power this year.
As a point of clarity, Social Security COLAs are based on a subset of the CPI -- the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. In January, the CPI-W rose 6.3% on an annual basis, compared to the broader CPI's annual increase of 6.4%.
But clearly, a 6.3% uptick in inflation is lower than 8.7%. So seniors on Social Security might actually get a chance to shore up their finances a bit this year. This is important, given that so many retirees struggled immensely with higher expenses in 2022.
Another thing seniors have going for them this year is that the cost of Medicare Part B has shrunk for the first time in a long time. Seniors who are enrolled in Medicare and Social Security at the same time have their Part B premium costs deducted from their Social Security benefits. When the cost of Part B rises, COLAs can shrink. But since the cost of Part B went down this year, that generous 8.7% COLA should go a lot further.
Are we in for another year of interest-rate hikes?
The Fed is eager to slow the pace of inflation and has made it clear that it won't back down on interest-rate hikes until living costs drop substantially. But the Fed's quest to bring down inflation is apt to help Social Security beneficiaries just as much as everyday consumers -- if not more so.
Although Social Security got a nice boost this year, financial struggles could still ensue for those who rely on it as their primary source of income. But the more inflation shrinks, the easier it will be to get by largely on Social Security -- even though that financial setup is far from ideal.
