The Bureau of Labor Statistics reported that CPI-U inflation came in at 8.3%, down slightly from 8.5% last month.
The more critical CPI-W rate, which the Social Security Administration uses to calculate the benefits COLA (cost of living adjustment) hikes, came in at 8.7%.
CPI-W stands for the Consumer Price Index for Urban Wage Earners and Clerical Workers. The more commonly used CPI-U rate is the CPI rate for All Urban Workers.
I talked about these two rates in my recent article, "Social Security Benefits COLA Hike Depends on Next Two Reports."
CPI-W vs. CPI-U
You can see these changes in the chart I have prepared below.
The good news is that inflation is starting to slow. You can see that there have now been two months where inflation has declined from its peak in June for both series.
However, the CPI-W rate is still now much higher than the CPI-U rate. This will influence how the Social Security Administration will calculate the COLA rate hike for 2023.
COLA Scenarios for Social Security Benefits
The annual COLA hike is based on the average for Q3 (i.e., July, August, and Sept.). It will be announced next month on Thursday, Oct. 13. when the SSA announces the Sept. inflation numbers.
We can run several scenarios to estimate what the COLA hike will be.
- Scenario 1: Let's assume that inflation improves by 5% in September. That lowers the CPI-W rate by 5% from 8.7% in August to 8.3% in Sept. (i.e. 95% x 8.7% = 8.265% YoY). (Note, the SSA always rounds to the nearest 0.1 decimal point, not 2 or 3 points).
That implies that the average CPI-W for Q3 will be 8.7% (9.1% + 8.7% + 8.3%)/3 = 8.7%.
- Scenario 2: Let's assume that inflation improves by 10% for the month of Sept. to 7.8% (i.e., 90% x 8.7% = 7.83%).
That will make the average for Q3 will be 8.5% (i.e., (9.1% + 8.7% + 7.8%)/3 = 8.53%).
This means that the average could range from 8.5% to 8.7%, and the average is 8.6%.
However, the rate could be higher if inflation does not improve as it has done in the past two months. For example, if the CPI-W rate stays flat at 8.7% in Sept., the average for Q3 will be 8.8%.
To get even more technical, if we assume there is a 75% probability that the average comes in at 8.6% and there is a 25% likelihood that inflation stays flat, the average will be 8.7%. Here is how that works:
75% x 8.6% = 6.45%
25% x 8.8% = 2.20%
Therefore, 6.45% +2.20% = 8.65%, which rounds up to 8.7%
Expect to see the Social Social Administration raise its benefits by 8.7% for 2023. This will be announced on Oct. 13.
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