The Escalation of Oil Prices is Contributing to the 2024 COLA Uplift.

The surge in oil prices has recently been a topic of concern, stirring discussions among economists and policymakers. However, this scenario has a silver lining for retirees.

The announcement of the Cost of Living Adjustment (COLA) by the Social Security Administration (SSA) is an annual event crucial for retirees. COLA determines the increment in Social Security checks for the following year based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The recent inflation reports, propelled by a spike in gas prices due to OPEC’s (Organization of Petroleum Exporting Countries) cutback on oil production, have hinted at a potentially favorable COLA for 2024. Since the COLA is calculated only for the third quarter, the timing of the jump in oil prices is ideal for retirees.

As one of the major components of inflation, oil prices are likely to be the most volatile. As gas prices fluctuate constantly, the winter months are less likely to see high gas prices. Retirees, in general, tend to spend less on gas than working individuals, making the inflation caused by rising gas prices less impactful on them. With the oil prices remaining high, it’s anticipated that the Social Security COLA could be between 3% and 3.5% in 2024, a significant bump compared to what it might have been without the oil price surge.

On the broader economic spectrum, analysts have shared perspectives on why the rising oil prices may not necessarily spell doom. The current rally in oil prices is considered small historically, and there’s a belief that falling electricity prices could offset it due to lower prices for coal and natural gas. Additionally, increased capital expenditures from energy sector companies could boost the GDP.

Although higher oil prices may lead to increased costs for consumers at the gas pump, this spending represents a smaller portion of total household consumption, which helps to mitigate the negative macroeconomic impacts. Moreover, the Federal Reserve is unlikely to raise interest rates solely due to a rise in oil prices, especially when core inflation and inflation expectations are trending downward. The rise in oil prices has already flowed through the Consumer Price Index (CPI), meaning any further increase is unlikely to drive inflation higher.

There’s also a discussion on the U.S. government’s ability to influence oil prices through the Strategic Petroleum Reserve (SPR). However, the effectiveness of this mechanism might be waning as the reserves have dwindled to their lowest since 1983.

While the rising oil prices have been a cause for concern, they bring a mixed bag of implications. For Social Security beneficiaries, the scenario will lead to a higher COLA in 2024. The official number regarding cost-of-living adjustment for Social Security checks will be known in a few weeks after the September CPI is released in mid-October. However, if gas prices decrease during the winter, the recent price spike will benefit retirees without causing a long-term impact on energy costs. This is because retirees will receive an increased cost-of-living adjustment for their Social Security checks in 2024.