Prices Rise – Yet No Cost of Living Adjustment for Social Security Recipients

Based on all common measures, inflation is entirely nonexistent at this point in time. But if you ask the typical person how they feel, you might wind up with a very different response.

On Friday, we learned that the Consumer Price Index ticked up 0.1% in September for a 1.1% gain in the past 12 months.

Since consumer prices have stagnated, recipients of social security will not receive a cost of living adjustment (COLA) for next year, the second year in a row. Sadly, according to research from the Employee Benefit Research Institute, social security accounts for nearly 40% of the income for individuals 65 years and above.

What is not reflected in the most recent CPI figures, and the problem for those not receiving COLA adjustments is that the world is becoming a more expensive place in certain respects. Corn prices surged after the Department of Agriculture announced that corn production would fall 3.4% in 2010. Wheat is undergoing comparable pressure due to drought in Russia and dry weather conditions in the US Midwest, and cotton prices are now at their highest levels since 1870.

Producers, those who make the goods that we consume are experiencing higher production prices, up 4.0% over last year. Up to this point, producers have more or less been forced to “eat” higher commodity costs since they recognize that consumers are not in a position to pay significantly higher prices. However, relying on producers to continue subsidizing those costs is unrealistic.

Inflation is arguably not an issue for the time being, but with the Fed prepared to unleash trillions in additional liquidity, the outlook for inflation is more uncertain than ever. Investors and consumers alike should tread very, very carefully.