Seniors' reasons to cheer inflation

July 06, 2008|By Harriet Johnson Brackey | Harriet Johnson Brackey,South Florida Sun-Sentinel

Three cheers for inflation, especially this summer.

Believe it or not, there is a reason to say it: Older Americans have a floor under their income because Social Security retirement benefits are adjusted for inflation every year. Many say that last year's inflation adjustment was small, compared with this year's rate.

Indeed, recipients received a 2.3 percent raise, which gave them each about $25 a month on average. Inflation, of late, has been much higher. No wonder seniors feel squeezed. But this year should be better when new rates are calculated in October.

That's the way it works. When inflation is rising, seniors will hurt until the next inflation adjustment kicks in. That's where the three cheers for inflation come in. It might turn out quite differently for seniors this year.

The Social Security Administration bases its inflation adjustment on the average inflation rate in this year's third quarter, compared with the previous year's third quarter.

That means the inflation rates nationwide for July, August and September are what matter. Last year, inflation was running very low in August, at a 1.8 percent rate, and not much higher in July, at 2.3 percent, and at 2.8 percent in September.

This year, inflation is not that low. The most recent reading we have was a 4.5 percent annual rate in May.

That's not the rate you hear about in news articles. It is different from the CPI-U, the Consumer Price Index for all urban consumers, which is the rate quoted most often. That was 4.2 percent in May. The Social Security adjustment is pegged by law to the CPI-W, which measures costs for households that have hourly wage earners or clerical workers.

The CPI-W is often used in labor negotiations. It is based on a survey of 32 percent of the total U.S. population, according to the Bureau of Labor Statistics. The CPI-U is a larger survey based on 87 percent of the U.S. population.

That 32 percent is suffering more than others, as could be expected because inflation would hit those with lower incomes harder. The CPI-W has been running higher than the CPI-U.

Here is how this will all work out for seniors. If inflation this summer continues at a high rate, they will receive a boost in their benefits next year. But the Federal Reserve's Open Market Committee recently said it expects inflation to "moderate" by next year. So seniors will have more money and perhaps more purchasing power, as well.

Of course, the Fed policymakers said they might not have that correct.

They said "uncertainty about the inflation outlook remains high" because of energy prices.

There is no guarantee things will start to settle down, once the total effect of the Fed's many interest rate cuts settles in.

Still, a sizable inflation adjustment next year will put money into the economy and help seniors deal with the energy prices that are hurting us all.

Notes Virginia Reno, vice president for income security at the National Academy of Social Insurance, a think tank that studies Social Security and other public programs, "It's a small consolation." But not as small as last year's.

Harriet Johnson Brackey writes for the South Florida Sun-Sentinel.

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