Global Courant
If you’re a retiree receiving Social Security, you probably know that one of the most important days of the year is just around the corner.
The Social Security Administration (SSA) announces the Cost of Living Adjustment (COLA) each year in mid-October. The COLA is the amount by which your Social Security checks will increase next year, and the size of the increase is based on a specific inflation rate called the CPI-W, or the Consumer Price Index for Urban Wage Earners and White-collar Workers. The SSA uses the third quarter CPI-W inflation, or the average of the July, August and September figures, to determine the COLA for the following year.
With the August inflation report last week, Social Security beneficiaries got some potentially good news, thanks to a surprising source, OPEC (Organization of the Petroleum Exporting Countries). Let me explain.
Image source: Getty Images.
Inflation is heating up
We found last week that the main inflation gauge, the Consumer Price Index for All Urban Consumers (CPI-U), rose the fastest monthly average of the entire year in August, up 0.6%, or 3.7% over a year past. The main reason for the acceleration in the inflation rate was higher gas prices, which rose 10.6% from July to August, and the Bureau of Labor Statistics said this was the largest contributor to the overall increase in monthly consumer prices.
Oil prices rose in August and continued to rise in September, largely because OPEC cut production to raise prices. The cartel has been restricting production for several months now, and US gas prices are now at their highest level in all year. Saudi Arabia, OPEC’s largest producer, said in early August that it would extend its voluntary cut of 1 million barrels per day through September, and Russia also said it would cut exports by 300,000 barrels per day.
Production cuts are now expected to continue until the end of the year, as the International Energy Agency (IEA) forecast that the oil market would tighten further in the fourth quarter.
Why it’s good news for Social Security beneficiaries
The timing of the oil price increase is well suited for retirees, as the third quarter is the only period of interest for COLA calculations. Additionally, oil prices are probably the most volatile component of inflation, and retirees typically spend less on gasoline than working Americans because they don’t have to commute to work.
The CPI-W has slightly different weights than the CPI-U and covers a smaller percentage of the population, but the figures are generally comparable. In August, the CPI-W rose 3.4% year-on-year, compared to 3.7% for the CPI-U, while the CPI-W rose 2.6% in July, below the 3.2% that the CPI -You registered .
With oil prices remaining high in September, the annual CPI should be similar to August, meaning Social Security’s COLA in 2024 will likely be between 3% and 3.5%. Without the recent spike in oil prices, the increase appears to be on track to less than 3%.
While no one likes paying higher prices at the pump, gas prices are volatile, and current prices are a poor predictor of where they will be in, say, three months. The chart shows how retail gasoline prices have fluctuated over the past year, ranging from about a dollar over that time.
US retail price for gas data Ygraphs
There is another reason to be optimistic that gas prices will soon fall again. Gas stations will soon switch to a cheaper winter blend, and gas prices typically drop in the colder months as demand decreases as the summer season ends.
With the average monthly Social Security benefit now around $1,800, Social Security recipients should receive an average COLA of around $60 next year, with the recent spike in gas prices providing a significant boost.
We’ll know the official figure in a few weeks after the September CPI comes out in mid-October, but if gas prices moderate over the winter, the spike seen in recent months looks like a win-win for retirees. will reap the benefits of a higher cost-of-living adjustment for their social security checks in 2024, without necessarily suffering long-term impacts from energy costs.
