Government Forecasts Decrease In Consumer Prices

Well, that's what the headline should be on this article from this morning's Minneapolis Star Tribune that includes the phrase:

"... the report projected that the millions of Social Security recipients would receive a small - 0.7 percent - cost of living increase in their benefit checks in 2012."

0.7 percent, thus, is the forecast from the Trustees of the Social Security Funds.

Any other guesses?

Well, let's go back about six weeks to this March 27 Associated Press article that makes two guesses in one sentence!

... the trustees who oversee the Social Security project a 1.2 percent COLA. President Barack Obama, in his spending proposal for the budget year that begins Oct. 1, projects a COLA of 0.9 percent.

Wow! Those trustees change their minds quickly, don't they?

Maybe we should take a look at how the COLA is calculated and then take our own guess. Let's start by looking at an analysis that doesn't come from the payers of the COLA. Let's ask some of the recipients. Here is an analysis from the National Active and Retired Federal Employees Association. They are taking a conservative view and are projecting a number around 2.9% at the moment. But they give us the tools we need to calculate and project the number ourselves. (Social Security COLAs and other Federal pension COLAs are calculated the same way.)

The key to the calculation is the "Consumer Price Index for Urban Wage Earners and Clerical Workers." You can find a table of values for that arcane index right here. It is calculated and updated monthly. For obscure reasons that I won't go into here, the base period is the average of July, August and September of 2008. That number is 215.495

At the end of April, the index was 221.743, an increase of 2.9% Hey, looks like the union got it right!

But let's look at the past few months' performance of the CPI-W:

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep
2011	216.4	217.5	220.0	221.7

The number that is going to be used to be compared to 215.495 to calculate the COLA is the average of July, August and September. Looking at the trend for the first four months of the year, what is your guess? I'd say we will probably be looking at 225. That would give us 225/215.495 and there would be a 4.4% COLA increase coming in 2012. What is your guess? Whatever it is, it is bound to better than the StarTribune's. Any number between 2.9 and 5.0 should be in the ballpark.

Will some/most/all of it get eaten up by an increase in Medicare Part B premiums? Sure, but that's an entirely different story.

Look for an update on this post in the Fall, when the actual COLA number is announced. And you can be 100% certain that the word, "unexpected" will appear prominently in both the AP and Star Tribune stories that will accompany the announcement.

UPDATE: June 17
Yesterday's release of the May CPI figures gave us:
May 222.954 - that puts us a bit ahead of the game for my forecast. Stay tuned!

Update: July 19
The June CPI figure gave us:
June 222.522 - a slight decrease from May. Steady at that number would result in a 3.3% COLA adjustment. The next three month's values for the CPI-W are the actual numbers that will be used. I'll start a new post for those.