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MinnEcon Blog

Consumer price inflation

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Government statisticians said today that consumer price inflation remains tame. The Consumer Price Index (CPI) is up a mere 1.1 percent over the past 12 months ending in August. The so-called core rate of inflation--the CPI minus volatile food and energy--has risen a 0.9 percent over the same time period.

Economic numbers like gross domestic product and the consumer price index often seem abstract. But here's a real world implication of the latest CPI figures that will affect the finaces of some 50 million Americans. It looks like Social Security beneficiaries will receive no Cost of Living Adjustment (COLA) for the second year in a row.

The COLA for Social Security is calculated every October. The CPI data from the third quarter (July-August-September) is compared to the previous year's number. So, for 2011 Social Security recipients won't get a payment increase.

Many retirees will feel the financial squeeze. For instance, medical costs are going up and the elderly use health care services more than younger adults. The Bureau of Labor Statistics has tried to figure out if older Americans face a different inflation rate than the rest of the population. The BLS created an experimental inflation index called the CPI-E to capture the inflation rate of the elderly.

It's higher. The CPI-E rose by 126.5 percent from 1982 to 2007 (the years of the experimental index) compared to 110.0 percent for the CPI-W. (The CPI measure used for the Social Security COLA calculation.) In other words, the elderly faced average annual increases of 3.3 percent and workers 3.0 percent.

The good news: If we did get deflation--an overall decline in the price level--as a growing number of Wall Street analysts fear, Social Security benefits can't be cut. They just stay unchanged.