Inflation is already racing past next year's Social Security COLA

By Brett Arends

The latest inflation figures from the United States government are worrying news for senior citizens -- and I'm not even talking about 80-year-old Joe Biden, although they threaten his re-election campaign as well.

Social Security beneficiaries are going to have to make do with a mere 3.2% cost-of-living-adjustment to their monthly checks starting January, the program's administrators said Thursday.

Read: Social Security's COLA for 2024 is 3.2%, vs. 2023's historic 8.7% inflation-fueled adjustment

That will mean about an extra $59 a month for a retired worker on the average monthly check of $1,840.

Meanwhile, the signs are that the actual prices you'll be paying at the store, the barbershop and gas pump next year are likely to rise by more than that -- and possibly a lot more.

The headline inflation figure came in at 3.7% in September. But that's a backward-looking number, comparing current prices with those a year ago. What's happening to prices today? The latest figures show consumer prices rose 0.4% between August and September. That's an annual rate of 4.9%. They've risen 1.1% since June, meaning an annual rate of 4.9%.

The inflation number that Federal Reserve chairman Jay Powell watches most closely is even worse. Prices for services other than rent -- meaning for everything from haircuts to airline tickets -- are now rising at a stunning annual rate of 7.4%, the latest figures show.

That's three times the rate from just a couple of months ago.

This shows scant success so far for Powell, who has been hiking interest rates for 18 months to kill inflation. He's jacked the key short-term interest rate from 0% to above 5%. Yet inflation, like The Thing in John Carpenter's cult horror movie, just won't die.

Maybe we shouldn't be surprised. It must be hard to cool down the economy as long as Uncle Sam keeps running these gigantic deficits: $1.5 trillion this fiscal year, and counting.

But if the latest inflation numbers don't say "even higher for even longer," what do they say?

Wall Street, as usual, wants to look on the sunny side. Economists reacted to the latest numbers by admitting that inflation was proving "sticky," and that maybe, just maybe, there might be a case for another Fed hike.

In reality, it is hard to see how the latest news can be spun as good news for seniors, Americans under 65, the administration -- or the bond or stock markets, for that matter.

Read this next: U.S. corporate borrowers face record refinancing needs as funding costs reach 13-year high, Moody's says

The markets seem to agree. Fed futures responded to the latest inflation data by hiking the odds of a further Fed quarter-point rate hike this fall. Maybe more shockingly, the markets now give it as even money whether Powell will be able to cut short-term rates at all before the presidential election next year.

Biden and the administration wanted the inflation crisis long in the rear-view mirror before then. The latest data may spell more political trouble for them. No wonder betting markets now have the next election a tossup between Biden and He Who Must Not Be Named.

The annual cost-of-living adjustments or COLAs for Social Security beneficiaries, which are announced this time every year with the September inflation figures, are always a bit of a con. They will take effect in January and are supposed to compensate you, the senior citizen, for the rise in prices next year. But they are based on the rise in prices over the past 12 months from the summer of 2022 to the summer of 2023. So at best, they're always a year out of date.

Higher inflation is good for the Social Security Administration and for Uncle Sam. Wages and FICA taxes typically rise with inflation straight away. Meanwhile, Social Security benefits don't get their inflation bump until a year later. Great for the cash flow. Higher inflation also quietly pushes more seniors into the brackets where their Social Security benefits are taxed. Once that only applied to the rich. Now it applies to half of all seniors. In due course, it will apply to everyone.

-Brett Arends

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10-14-23 1356ET

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