As inflation rages, government counters with 8.7% Social Security increase for 2023

The U.S. government released a Dickensian – “best of times, worst of times” – economic report on Thursday, revealing it doesn’t really have a handle on cooling inflation despite record interest rate hikes. At the same time, it awarded retirees with a whopping increase in Social Security benefits.

Consumer prices rose 8.2 % for the year through September, an amount faster and higher than many economists had predicted, though it is down slightly from the August 8.3% rate. The number was pushed upward primarily by rising costs of food, rent, and other items.

Minus food and fuel increases, overall inflation rose 6.6%, which revealed a noticeable acceleration of the Core Index, which measures prices paid by consumers for goods and services without volatile price factors. It rose to its highest level this year and at a faster rate than the annual increases of 1982.

Rate hike expected

“The hotter than expected inflation report means that the data dependent [Federal Reserve] will continue hiking rates in an effort to stem inflation,” said Robert R. Johnson, professor of finance at Creighton University College of Business and Chairman and CEO at Economic Index Associates, in New York City. “The latest numbers provide a near certainty that the Fed will hike rates by 75 basis points after its November 1-2 meeting.”

While some are calling for an even larger rate increase, Johnson said he believes there is little chance that would happen before the November 8 midterm elections.

At nearly the same time, the government Thursday announced an 8.7% raise in Social Security benefits beginning in January, the biggest bump up since 1981, according to the Social Security Administration. The move might help take the sting out of rising prices for about 70 million Americans collecting the retirement benefits.

“This boost in benefits can help retirees better meet their day-to-day needs given rising inflation.”
— Katherine Tierney, CFA, senior retirement strategist at Edward Jones

“This boost in benefits can help retirees better meet their day-to-day needs given rising inflation,” said Katherine Tierney, CFA, senior retirement strategist at Edward Jones, the nation’s largest financial services firm. “It may even enable them to reduce how much they need to withdraw from their investment portfolio, which can be especially beneficial in down markets.”

The pandemic and resultant supply chain disruptions are cited as the double-barrel shot that has led to the fastest rates of inflation in decades. Demand for goods and services remained high through the pandemic which pushed prices upward. The Russian invasion of Ukraine worsened things by forcing big increases in fuel and food prices.

Experts look ahead

While there were vague signs that inflation may have peaked, some experts strained to find much positive in Thursday’s inflation numbers.

“If you look at the the core goods, that was down month over month, and I think equities are reacting to the fact that prices are going in the right direction, even though they do appear to be sticking strong,” said Eric Merlis, managing director and co-head of global markets at Citizens Bank. “As long as labor stays strong – people very rarely pull back their spending meaningfully, when they're working and their pay is going up. The continuing claims numbers and the initial claims numbers, to be honest, are kind of encouraging. “

Merlis, like other experts, said Thursday’s numbers make a recession more likely, however not a long or deep recessionary period.

“If I thought it was going be really bad, I would say so,” he said. “Yes, if the labor market falls off a cliff, then I think it will be very severe. But I don’t see that. If unemployment stays below 5%, it won’t be like previous deep recessions.”

'Headwinds' for retirees

So how are consumers, particularly retirees, supposed to react to the economic news? Opinions varied.

“Retirees and near retirees are going to face headwinds in the financial markets in the near term,” said Johnson. “Those in the retirement red zone should take a more cautious stance. When a person is within a few years of retirement, say five years, they should begin to reduce their risk exposure in retirement accounts. A large downturn in the equity markets immediately preceding retirement can have devastating effects on an individual's standard of living in retirement.”

Johnson offered an example of someone who retired at the end of 2008.

“If they were invested in the S&P 500, there would have seen their assets fall by 37% in one year,” he said. “The retirement investor can’t afford a big downturn. It’s what’s called a ‘sequence of returns risk.’ A bad sequence of returns immediately preceding retirement can be devastating.”

Other experts advised making small adjustments in retirement withdrawals during down markets.

“They can have a meaningful impact on your portfolio's longevity,” said Edward Jones’ Tierney. “Social Security recipients could also put those extra dollars towards their cash reserves.”

Tierney said she generally recommends retirees maintain about one year's worth of spending needed from their investment portfolio in cash and up to three months' spending in an emergency fund.

“We recommend another three to five years' worth of spending needed from their investment portfolio be held in short-term fixed-income investments, which are now offering better income opportunities given multiple interest rate hikes.”

As for the near future, economists and advisors said we’re in an age of lowered expectations.

“While the Cost of Living Adjustment (COLA) for 2023 is certainly welcome, retirees probably shouldn't count on future increases being nearly as large as this year’s,” said Tierney. “The recent spike in inflation was exacerbated by a confluence of unusual factors, including pandemic-related government spending, supply shortages and the Russian invasion of Ukraine. As these issues work themselves out, we would expect inflation to subside, leading to smaller COLA bumps in the future.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

© Entire contents copyright 2022 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].