Seniors Get Raises, Everyone Else Not So Lucky

Inflation continues to be the biggest problem confronting the U.S. economy. The September Consumer Price Index showed that headline prices were up by 8.2 percent from a year ago, a slight improvement from the previous month’s 8.3 percent, as higher food prices (+11.2 annually percent due to Ukraine-related supply issues, avian flu, and drought in the West) and big increases in shelter and medical costs offset a monthly drop in energy.

But the core rate, which strips out food and energy, rose at a 6.6 percent annual pace, a new high of this inflationary cycle and the biggest annual increase since August 1982. That’s important because even as supply chain issues resolve, it means that the service side of the economy, which includes the cost of housing, continues to accelerate, services inflation advanced by 7.4 percent from a year ago, the most since 1982.

There was one bit of good news from the report: Social Security recipients will be getting a BIG raise next year. The Cost of Living Adjustment (COLA) for the 70 million recipients of SS benefits will increase by 8.7 percent in 2023, the biggest jump in 40 years (the COLA for 1981 was 11.2 percent).  On average, Social Security benefits will increase by more than $140 per month next year. Additionally, premiums and deductibles for Medicare Part B (outpatient care), will actually drop next year, which means that along with the COLA, many older Americans should be in better financial condition next year.

For those who are still working, average hourly earnings as of September were up 5 percent, which means that most are not keeping pace with even the core rate of inflation, let alone the headline rate. Real average hourly earnings (earnings adjusted for inflation) for all employees decreased 3 percent, seasonally adjusted, from September 2021 to September 2022. For production and nonsupervisory workers, who usually earn less money overall, brisk pay increases amid a tight labor market improved the situation, but not by much: real annual earnings for this large group were down 2.5 percent from a year ago.

Another area that inflation and wage gains impact is taxation. Many of the components of the IRS code are indexed to inflation annually, which can be a double-edged sword. For example, the range of income on which tax rates are applied could expand, helping some earners shield some of their income from the next tax, higher bracket. Conversely, there are many workers who will see more of their pay subject to the 6.2 percent Social Security tax.

As a reminder, Social Security is funded through payroll taxes, which are split between workers and employers (each side pays 6.2 percent) up to a certain wage. (If you are self-employed, you pay both sides, for a total of 12.4 percent.) The income subject to the tax changes each year, matching changes in the national average wage index (also referred to as “the contribution and benefit base”). For earnings in 2023, this base is $160,200, an increase from the 2022 level of $147,000. That means that extra $13,200 of earnings will cost workers an extra $818 in payroll taxes next year.

The September CPI, along with the still-solid labor market, means that all systems are go for another 0.75 percentage point increase at the Fed’s November meeting, and there’s likely to be another hike at the December meeting. As the central bankers battle the wildfire of high prices, the question is at what cost? High prices should eventually come down, but so too will economic activity, likely pushing the U.S. into a recession in 2023. Whether the recession is long and deep or shallow and short, the Fed will be tarred with contributing to the inflationary fire, by arriving on the scene too late, and not lauded as the brave souls who were able to snuff it out.