Why is Cola projected at 2.7% when my bills are skyrocketing – Understanding inflation’s real impact

Inflation has continued to chip away at our purchasing power despite the modest raises we may have gotten from our employers or the inflation-adjusted boost to various benefits. Indeed, inflation seems more or less tamed when you have a look at the CPI (consumer price index) figures. However, there’s a palpable difference between the headline inflation number and what everyday Americans are experiencing.

Inflation is cooling, but why does it feel like a 2.7% Cola isn’t quite enough?

Undoubtedly, nosediving gasoline prices have dragged down the CPI number under the 3% mark. But for the many Americans who don’t drive, they’re not feeling all too much in the way of relief. Food inflation was a tad hotter than the headline inflation figure at just a hair shy of 3%. Additionally, rent inflation is still a tad on the steep side. So, as energy prices pull the CPI lower, food and shelter have pulled it higher. And that’s not even considering the wave of inflation that left its mark in prior years.

Indeed, Americans need a break from all this inflation. And while the Cola (cost of living adjustment) has been adjusted, now at 2.7%, seemingly keeping pace with the rate of inflation, it seems like the modest increase does not account for the sticker shock at the local grocery store. Further, rent increases may be magnitudes higher than the latest projected Cola. Given this, many Americans may find that they’re falling behind as the costs of necessities rise at a slightly hotter rate than the CPI.

Undoubtedly, it’s getting tougher to keep up, even though the worst of the inflation storm seems to be past us. With the Federal Reserve likely to cut interest rates, there’s always the risk that inflation picks up again. And Cola may not be able to offset the real pains that various American consumers feel. In any case, I think retirees should take matters into their own hands by pursuing dividend and dividend growth stocks that can help better defeat what remains of inflation.

How retired investors can better combat inflation as the Fed rate cuts begin

With weak employment data, the Fed may finally get to slash interest rates. But for retirees who are fed up with inflation, such rate cuts may lead to more nasty price increases. Indeed, Cola may or may not be able to keep up with food inflation (the most important inflation component, in my view). As such, investors may wish to embrace defensive dividend plays that can grow their payouts far faster than the rate of inflation. It’s not too out of the ordinary to see a dividend grower that’s able to sustain a more than 5% dividend growth rate in all sort of environments. 

Whether we’re talking about a telecom firm like AT&T (NYSE:T | T Price Prediction), which boasts a respectable 3.84% dividend yield alongside a good amount of dividend growth potential, or a name that’s able to offer more on the front of long-term dividend growth, like a Goldman Sachs (NYSE:GS), amid industry tailwinds, there are ample options for investors to stay ahead of inflation, even as the Cola adjustment comes up short of food or shelter inflation figures. For investors seeking to take on less risk, perhaps investing a greater chunk of cash in a TIPS (Treasury Inflation-Protected Securities) is worth stashing away for the protection against inflation.

Either way, staying invested and not hoarding too much cash (which is pretty much guaranteed to have a negative real return unless we have massive disinflation or deflation) is a wise move at this juncture. As always, chat with a financial adviser about such concerns so that they can help you on your journey in a climate that may see inflation stay a bit higher for longer as interest rates look to go on the descent.