Social Security COLA Estimate Rises to 10.5% for 2023 as Inflation Accelerates in June

Hidden Costs of A Big Social Security COLA in 2023

While a high COLA helps retirees keep up with the cost of goods and services, there are consequences that boosted Social Security income can have that affects overall financial security, and the COLA doesn't cover some key costs for retired and disabled Social Security recipients, Johnson noted. She explained that:

• Increases in the Medicare Part B premium often outpace inflation and Social Security COLAs. In 2022, Part B premiums rose 14.5%, one of the biggest jumps in program history. "The Part B premium is automatically deducted from Social Security checks, and in 2022 beneficiaries are still smarting from this," Johnson said.
• Higher income from COLAs often leads to cuts in income-related benefits for low-income people, and higher taxes for those with incomes above $25,000 for individuals and $32,000 for married couples. This tax impact is not felt until tax time (starting in April 2023). "The Senior Citizens League believes tens of thousands of retirees who have not paid taxes on their benefits in the past may discover they must start doing so in 2023," she said. "Because the income thresholds are not adjusted like ordinary tax brackets, these once-in-a lifetime COLA increases could lead to permanently higher taxes for many retirees." 
• Higher incomes could lead to a loss of income-adjusted Medicare health and prescription drug benefits for low-income beneficiaries, and higher-income recipients could wind up paying higher Medicare Part B and Part D premiums.

Market Reaction to Inflation and Rising CPI

The 9.1% increase exceeded the 8.8% median forecast from economists polled by Bloomberg, and comes as the Federal Reserve has been aggressively raising its benchmark interest rate in an effort to tame inflation sparked by several factors tied to the pandemic and Russia's Ukraine invasion. The Fed last month raised its benchmark interest rate 75 basis points, its biggest hike in 28 years. 

Bloomberg reported that stock futures dropped and bond yields rose this morning after the higher-than-expected inflation report and cited expectations that the numbers mean the Fed will continue to aggressively raise interest rates this year. Swap markets indicate traders expect at least a 75-basis-point increase and possibly a full  percentage point hike in the Fed benchmark rate this month, according to Bloomberg.

The news service quoted Cliff Hodge, chief investment officer at Cornerstone Financial, as saying the "ugly" June CPI leaves the Fed no choice but to take a more aggressive path, "which raises the probability of recession next year."

Earlier this week, Bloomberg reported that the latest survey of roughly 1,300 heads of households conducted by the Federal Reserve Bank of New York found that U.S. inflation expectations for the next three years fell to 3.6% in June from 3.9% in May, the largest decline since January. The three-year forecast peaked at 4.2% in October.

The one-year inflation outlook worsened, however, with median expectations rising to 6.8% last month – an all-time high for the nine-year-old survey — from 6.6% in May, according to the New York Fed's June Survey of Consumer Expectations, Bloomberg reported.

Consumers also expect residential rents and food prices to keep rising sharply in the coming year and anticipate household incomes will increase by 3.2%, far below the expected inflation rate, according to the news service.

Some market watchers note the latest figures don't take into account more recent price trends that could indicate cooling inflation.

'Last Hot Month' for Inflation?

David Kelly, chief global strategist at J.P. Morgan Asset Management, said in prepared comments Wednesday that the firm took the report "to reflect a good deal of lagged bad news — higher energy prices, labor costs and food prices — but we do expect lagged good news in the coming months, with energy prices diving lower, food prices cooling and consumer demand stepping back."

"This should provide some inflation relief to the Fed and consumers, and hopefully lead sentiment to recover from its record-lows. The question remains, however, whether the Fed will exercise the patience for the lagged good news to flow through or race to stomp out demand before it does."

J.P. Morgan sees "promising signs" that inflation will come off its highs this month, given recent oil and gas price drops. If the trend persists, June may be "the last hot month" for headline inflation, Kelly wrote. The firm maintained its expectation that the Fed will raise interest rates by another 75 basis points later this month.

 AAA reported that gasoline prices declined to $4.63 on average nationally today, down from a record high of roughly $5.02 set on June 14.

On Monday, Kelly noted other signs indicating cooling inflation, including data from Hopper.com indicating that domestic airfares appear to have declined in June and July. Indeed, the BLS said today that airline fares and lodging away from home were among the few major component indexes to decline in June.

LPL Financial, in its midyear outlook released Tuesday, before the latest CPI figures, predicted inflation most likely will remain significantly above the Fed's long-term 2% target through year end, and that "inflation rates will likely cool throughout this year, but the cool down period will be long and slow. Some inflation pressures should subside as China adjusts its COVID-19 policy and supply chains improve. A slowing housing market could also eventually ease inflationary pressures later this year and into 2023."

The BLS tweeted late Tuesday that a purported CPI release image circulating on Twitter was a fake.