February's Inflation Numbers Could Spell Bad News for Your Upcoming Social Security COLA

U.S. consumers struggled immensely in 2022 as inflation soared from the start of the year through the end of it. A lot of people closed out the year in debt, because that's what it took to keep up with their bills.

But while inflation is still much higher than average, it's slowly but steadily cooling. Last June, the Consumer Price Index (CPI) showed a 9.1% annual increase in inflation. Most recently, in February, the CPI showed a 6% annual increase. That's a notable decline.

But while falling inflation is great news for consumers in general -- and particularly budget-conscious retirees -- it could spell trouble for Social Security recipients. If the rate of inflation keeps dropping, next year's Social Security COLA (cost-of-living adjustment) may not be much to write home about. And that's putting it mildly.

Social Security cards.

Image source: Getty Images.

A mixed bag

People are desperate for relief from inflation, and that extends to seniors who get most, or all, of their retirement income from Social Security. The fact that inflation is dipping and living costs are dropping in many key consumer categories is a good thing in that regard. But a continuous decline in inflation could lead to a minimal -- or even non-existent -- Social Security COLA in 2024.

Social Security COLAs are based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a subset of the CPI. This year, seniors on Social Security received an 8.7% COLA in January -- the largest to come down the pike in decades. But in February, the CPI-W rose just 5.8% year over year. If that trend continues, seniors might have to kiss a 2024 COLA goodbye.

See, for Social Security recipients to get a COLA, average CPI-W readings during the third quarter of the year have to come in higher, on average, than the readings during that same three-month period the previous year. If inflation continues to trend downward, that may not happen.

To be clear, an ongoing dip in inflation isn't guaranteed -- even with the Federal Reserve doing what it can to cool inflation by implementing interest rate hikes. But even if seniors end up with a Social Security COLA in 2024, it may not be anywhere close to as generous as 2023's raise.

Take advantage of higher benefits today

Social Security recipients won't see their monthly benefits go down in 2024 if inflation continues to cool. There's no such thing as a negative COLA. The worst that happens is that benefits don't get a boost at all.

But since a $0 COLA is possible for 2024, seniors on Social Security should do what they can to try to shore up their finances this year. Unfortunately, many will inevitably have little wiggle room in their budgets due to living costs still being high. But those with the ability to tuck some of that money away for a rainy day may be thankful for having done so if a COLA doesn't come through for the new year.

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