Due to inflation, COLA 2025 estimates are increasing each month | FedSmith.com

The 2025 COLA estimate continues to rise

Inflation has been persistent over the past few years.

The 2024 cost of living adjustment (COLA) for federal retirees was 3.2%. Some retirees may have been disappointed with the 2024 increase because of larger increases in the previous two years.

In 2023, the COLA was 8.7%, the highest in more than 40 years. In 2022, it was 5.9%, the highest in 40 years. The 2024 COLA was 3.2%, significantly less than the previous two years. While the COLA was less, the Federal Reserve’s target for inflation is 2% of course, this target has not been reached despite higher interest rates.

Each month, the Senior Citizens League estimates the next cost of living adjustment (COLA), which will be finalized in October. In April, it revised its 2025 COLA forecast to 2.6%. This was higher than the previous estimate of 1.8%, which was higher than the previous estimate of 1.4%.

In May, the League raised its estimate for the future COLA to 2.7%.

2.7% is only an estimate for the 2025 COLA. The actual COLA will be announced once third quarter inflation data becomes available. The estimates are useful for federal employees who plan to retire or have already retired, as they guide federal employee pensions and Social Security payments for 2025.

Should the inflation target be 2%?

Federal Reserve policymakers will probably leave their benchmark federal funds rate in place for now. It is still at its highest level in more than two decades. The reason is because of inflation.

Their preferred measure of consumer prices, from the Commerce Department, rose 2.7% from a year earlier in April. This is lower than in April 2023, which increased by 4.4%. This is not what stock market investors expected at the start of 2025. The expectation was that interest rates would be lowered to avoid slowing the US economy with higher interest rates.

Consumer sentiment is low due to inflation. Many Americans believe that their long-term financial security is fragile and can be quickly altered by various social and political threats. Some economists think that 4% would give the Federal Reserve more room to escape an economic downturn. Perhaps this is a valid theory, but popular sentiment is against the higher number. Inflation disrupts budgets and puts some people in economic trouble as their incomes may remain flat while inflation continues to drive up prices.

According to Wall Street Journal:

Reliable scales on economic scales, such as a college degree, no longer seem like a good investment. The war abroad and a brave group of hostile nations have made the world feel dangerous. Uninspiring leaders at home, running a government widely seen as dysfunctional, have left people without hope that America is up to the challenge of fixing its problems.

This is not good news for the Biden administration in an election year. In recent European elections, conservative candidates made significant gains. While European elections differ from state-by-state elections here, the results may foreshadow what will happen in November. According to this analysis:

The latest campaign in Europe successfully tested a message that mixes a potent political cocktail of public anger over what is perceived to be out-of-control migration, the pain of voters facing high prices and the cost to individuals of fighting climate change. Trump is hitting these themes hard in battleground states that will decide the race for the White House.

The rate of inflation affects the country, from its impact on economic security to political outcomes in elections.

The latest inflation data and the latest COLA change

Impact of inflation on everyday items from May 2024: Food, electricity, housing, new cars and transport services

In May, the Consumer Price Index for All Urban Consumers (CPI-U) remained unchanged after rising 0.3% in April. Over the past 12 months, the index of all items has increased by 3.3%.

The housing index rose in May, by 0.4% for the fourth month in a row. The food index increased by 0.1% in May. The index of foods outside the home increased by 0.4% during the month, while the index of foods at home remained unchanged. The energy index fell 2% during the month, led by a 3.6% drop in the gasoline index.

The Consumer Price Index for Urban Wage and Clerical Workers (CPI-W) rose 3.3% over the past 12 months to an index of 308,163 (1982-84=100). For the month, the index decreased by 0.1%.

This is 2.3% higher than the third quarter of 2023. This is significant because the annual COLA is determined by comparing the change in the CPI-W year over year, based on the average of the third quarter months of July, August, and September.

TSP results for June and year to date

While inflation is still active in the US economy and above the target of an inflation rate of 2%, investors in the Thrift Savings Plan (TSP) are seeing a good return on their investments in 2024.

The biggest gains, so far, on the TSP are for the C Fund, which is up 13.40% for the year to date since June 11. 6.54% for the year) are also doing well, but have lagged behind the C Fund.

END From month to date From year to date
G Fund 0.14% 1.96%
Fund F 0.71% -0.86%
Fund C 1.90% 13.40%
S Fund -1.15% 2.19%
I finance -0.97% 6.54%
L Income 0.27% 3.74%
L 2025 0.29% 4.35%
L 2030 0.39% 6.32%
L 2035 0.41% 6.73%
L 2040 0.43% 7.14%
L 2045 0.44% 7.49%
L 2050 0.46% 7.86%
L 2055 0.48% 9.36%
L 2060 0.48% 9.35%
L 2065 0.48% 9.35%
TSP returns to June 11, 2024 | Source: TSPDataCenter.com

2024 Ralph R. Smith. All rights reserved. This article may not be reproduced without the express written consent of Ralph R. Smith.

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