But it still does not cover the actual loss of purchasing power of the dollar.
By Wolf Richter to WOLF STREET.
Among the inflation data published today by the Bureau of Labor Statistics was the consumer price index for all urban wage earners and office workers (CPI-W), which is used to calculate cost-of-living adjustment (COLA) for social security benefits.
For August, the CPI-W rose by 5.8% year-on-year. In July it had jumped by 6.0%, in June by 6.1%. The summer readings are the highest since July 2008 and before that since 1990:
In comparison, the general inflation number published today, CPI-U, increased by 5.3% year-on-year.
COLA, to be applied to social security benefits starting in January 2022, is based on the average year-on-year increase in CPI-W in July (6.0%), August (5.8%) and September (released one month from now).
If the September reading comes in at 5.6%, COLA for 2022 will be 5.8% (average July 6.0%, August 5.8% and September 5.6%). This 5.8% would match COLA in 2009. Both would be the highest since 1982 (7.4%).
When the September value of CPI-W is released in about a month, we can estimate with some accuracy what COLA for 2022 will be (red = estimate based on the actual projection in July and August and September of 5.6% ):
Although this type of COLA will provide some relief from the price increases that have gnawed away at fixed incomes, it will still be insufficient to compensate for the rising costs that individuals may face in housing and other major expenses, depending on their situation and location.
If the recipient rents in a city where rents have been sky-high by the two digits, a 5.8% COLA will not go far. If a receiver drives a lot, the 43% jump in gasoline prices will hurt. The prices of used cars increase by 32% from a year ago, the prices of new cars 7.6%.
Housing costs account for almost a third of the normal CPI. But the housing cost index has been suppressed by the method by which it is calculated. The rent index rose only 2.1% and the home ownership cost index rose only 2.6%, while house prices rose at rates not seen in the decades we have data for: 23% according to the National Association of Realtors , and 19% according to the Case-Shiller Index (I explain the disruption in housing inflation and CPI with a fantastic chart).
Then there are healthcare costs, which can be a major problem despite all parts of Medicare.
The COLA for 2021 was only 1.3%, which was based on the average CPI-W in July, August and September 2020, where CPI readings happened to be very low. So given the price increases in 2021, the miserable 1.3% COLA this year leaves many people deep in the hole. And now many major spending categories have already exceeded what could be a COLA of 5.8% next year.
Inflation means that the dollar loses purchasing power. And over time, COLAs will intentionally be insufficient to compensate beneficiaries for the actual loss of dollar purchasing power they encountered in real life. If social security payments are the only source of income, actual inflation, as experienced in reality, will almost guarantee a sustained slow decline in living standards.
For this reason, it is important to have a nest egg with a combination of assets and / or create or maintain an extra income stream for as long as possible, preferably something that is fun to do and keeps people active and engaged. Even a small income income helps in a big way. Inflation, as one experiences it in reality, is the enemy of fixed incomes, even though those incomes are adjusted for inflation because these adjustments are likely insufficient to compensate for the actual loss of purchasing power in the dollar.
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