Social Security recipients will get a cost of living increase of 4% next year, the second largest in the last six years, the government announced Friday, as consumer prices continued an upward march, climbing an additional 0.3% in September.
After its annual calculation of next year’s benefit increase, which is linked to consumer price levels, the Social Security Administration said that the adjustment will amount to an extra $21 a month for the average retired worker now receiving $516 monthly.
Other increases include: a couple, both getting benefits, $38, to $921; a widow with two children, $42, to $1,112; disabled workers, $20, to $529; a disabled worker with a spouse and children, $41, to $943.
But, for the elderly and disabled, the increase will be partly diminished by a $7.10 monthly hike in Medicare premiums, which, beginning in January, will be deducted directly from the increased benefits.
The cost-of-living increase was slightly less than last year’s 4.2% hike but larger than any other since the 7.4% jump in 1982, when the economy was still racked by the hyperinflation of the late 1970s.
The Labor Department, in its monthly consumer price report, said that prices increased steadily in September, driven by drought-related hikes in food prices and a new-season jump in clothing prices. They were only partly offset by a steep decline in gasoline and home heating oil prices, to produce the 0.3% increase.
“It means that there’s still upward pressure on inflation,” said analyst Donald Straszheim of the Merrill Lynch investment firm in New York. “It’s modest, but it’s there.”
The number did little to ease economists’ fears that the Federal Reserve may at some point push up interest rates to counter inflationary pressures, running the risk of bringing on a recession.
“Unemployment is low and wages are beginning to rise, so we’re getting into a dead-end exercise that sooner or later the Fed will have to call a halt to,” Straszheim said.
After noting that consumer price inflation had been running at 0.4% for July and August, Stacy Kottman, an inflation specialist at Georgia State University in Atlanta, called September’s rate “a slight improvement” but noted that “it would be a mistake to get complacent.”
Even taking into account probable further declines in energy prices in coming months and slowing food price inflation, Kottman said, “there’s no reason to expect the 0.4% inflation rate without food and energy to turn down, so we won’t be seeing any fundamental decline in the pace of inflation.”
This year’s basic rate of inflation, discounting food and energy, is expected to be about 5%, compared to 4.4% for the 12-month period ending in December, 1987. This “will not now be dislodged any time soon unless we’re surprised by a recession,” said Roger Brinner of Data Resources Inc., a Lexington, Mass., economic forecasting firm.
Brinner said that, faced with such evidence, the Fed normally would crack down to pull the economy back to Fed Chairman Alan Greenspan’s preferred inflation rate of 3% or lower. However, the impact of higher interest rates on debt-burdened Third World countries and the ailing domestic savings and loan industry may be constraining such action, he speculated. The conclusion: “We’re stuck on a 5% inflation rate.”
The report cited a large 2% increase in clothing costs, with the introduction of the new season’s fashions, but a relatively moderate 1.9% hike in book and educational costs for the new school year.
Overall, the consumer price index rose about 0.7% before seasonal adjustment, from 119 in August to 119.8 in September, from a base of 100 calibrated to consumer prices at the end of 1982. Unadjusted consumer prices rose 0.7% in the Los Angeles-Long Beach-Anaheim area and stood 4.6% above the index for the metropolitan area a year earlier.
The Social Security benefit increase announced Friday is calibrated to a parallel price index that the Labor Department calculates for all urban workers. That index, which usually closely tracks the consumer price index for urban consumers, also rose 0.3% after seasonal adjustment in September and 0.7% before adjustment.
Social Security benefit increases have risen automatically once a year with the consumer price index for urban workers every year since 1975, except for a six-month lag in 1983 that was imposed to help bail the system out of a funding crisis.