Investors and economists worry about higher inflation, but the more immediate concern is inflation that's flat or even negative.
Retirement contributions, Social Security and pension checks, as well as certain tax breaks, are tied to inflation. And when inflation is flat or negative - which it is for the first time since the 1950s - that could mean no increases in Social Security checks and even smaller pension checks for millions of retirees. And it could restrict the amount you can sock away in your 401(k), just when many of us need to save more to make up for last year's losses.
The Consumer Price Index - which measures price changes on food, clothing, energy and other living expenses - is down 1.5 percent for the 12 months ended in August. Most of that decline has to do with the fact that energy prices shot up in the summer of 2008 and then fell.
"Generally, low inflation is a good thing, particularly for people on fixed incomes," says David Certner, legislative policy director for AARP. But in this case, retirees on fixed incomes will be hurt because the price of goods and services they use most often, particularly health care, still shoots up even when overall inflation doesn't, he says.
This week, the Social Security Administration will announce the cost-of-living adjustment next year for beneficiaries. Adjustments will be based on the inflation rate in the third quarter of last year compared with this year.
Based on inflation rates for July and August, September's prices would have to jump 6.5 percent from August for there to be positive inflation in this third quarter over last year's, says Steve Reed, an economist with the Bureau of Labor Statistics. That's not likely.
The expectation is that beneficiaries won't see an increase in Social Security checks next year - and the year after. This would be the first time since Social Security began automatically adjusting checks for inflation in 1975 that beneficiaries won't get a raise.
(For 2009, beneficiaries received a 5.8 percent increase, the largest increase since 1982, thanks to last year's energy price spike.)
Several bills in Congress would provide beneficiaries relief this time around. One would give Social Security recipients a one-time $250 payment, or about a 2 percent increase for the average retiree.
A raise would definitely help Esther Lenett, a 91-year-old Bethesda retiree who lives solely on her monthly $1,117 Social Security check.
