If you've been keeping an eye on your budget lately, your money isn't going as far as it used to. While costs tend to go up year over year, a significant jump may be due, in part, to rising inflation.

For people on fixed incomes, including retirees, a decline in purchasing power may have ripple effects. For example, changes to the cost of goods and services may impact your quality of life or some of your retirement plans. If you rely on your Social Security benefits as your primary income, these changes may leave you wondering, does Social Security increase with inflation?

Here's what you need to know.

What Is Inflation?

Inflation is the loss of your purchasing power over time. A simple way to think of it is as changing the standard costs of goods and services. A cup of coffee at your local favorite diner probably costs more now than it did 20 years ago — that's inflation at work.

There are a few primary methods the government uses for tracking inflation. One is the Consumer Price Index (CPI). It measures the change in year-over-year prices of a basket of goods and services people in urban areas typically buy. CPI for workers (CPI-W) is a related measure. It tracks the same basket of goods and services and the changes in costs for workers.

Economists use these indices to understand the effects of increases in costs of goods and services and the decrease in purchasing power over time. For example, as of February 2022, the CPI indicated a 7.9% rise (unadjusted for seasonal changes) over the previous 12 months.

Those numbers indicate you're not getting the same for your dollar today as you did one year ago. While the Federal Reserve typically expects a 2% inflation rate each year, the ongoing COVID-19 pandemic and the recent Ukraine conflict have boosted inflation to the highest levels since the early 1980s.

How Inflation Impacts Social Security

For those living on a fixed income, such as Social Security, inflation can impact retirement income. Inflation is a risk retirees should know about as it may affect quality of life.

To help combat this, the government can provide cost-of-living adjustments (COLA) to Social Security beneficiaries to keep pace with inflation. The Social Security Administration (SSA) determines COLA by using a formula that considers the average CPI-W from the previous year's third quarter to the average third quarter of the current year. If there is an increase, COLA reflects it. For example, the average CPI-W for July, August and September 2021 was 5.9% higher than the average CPI-W for July, August and September 2020.

COLAs are typically announced around October of each year, with any adjustments going into effect in January of the following year. So, adjustments for 2023 will be announced in October of 2022 and kick in on January 1st, 2023. The SSA also notifies beneficiaries of any COLA adjustments through the my Social Security account each December.

Previous COLA Adjustments to Social Security Benefits

Using their COLA formula and seeing a 5.9% increase in CPI-W from 2020 to 2021, the Social Security Administration announced a 5.9% COLA increase for beneficiaries in 2022. As a result, starting in January 2022, Social Security recipients got 5.9% more in their monthly checks to help combat inflation.

Something to keep in mind is that COLAs aren't always guaranteed. If prices fall or remain flat, there will be little or no change to COLAs (COLAs can't go negative). For example, in 2010, 2011 and 2016, there were no COLAs. Social Security beneficiaries received the same amount each month as they had the previous year. From 2018 to 2020, the increases ranged from 1.3 to 2.8%.

If you keep an eye on the CPI and CPI-W over the coming months, you can have an idea of how the SSA may approach COLAs in 2023. However, the SSA has the final say on actual rates and adjustments.

Keep Inflation in Mind as You Plan for Retirement

So, does Social Security increase with inflation? If you're still unclear about how inflation may affect you and your Social Security payments, you may want to consider speaking with a financial advisor about your situation. They can review your current savings plan and help you make any adjustments for inflation during this period, especially if you're closer to retirement.