Bob’s Journal for 6/16/22

Medicare Premiums Might Decline in 2023

Medicare beneficiaries were surprised in late 2021 by the announcement that the Part B premium would increase by 14.5% for 2022 from 2021’s level.

They might receive another, but a very different, surprise in late 2022. The Part B premium for 2023 might be lower than 2022’s premium.

Part of the hike in premiums for 2022 was an increase that should have occurred in 2021 but was delayed instead. During the pandemic, Congress passed legislation that prevented an increase in the Part B premium from 2020 to 2021.

But a big part of the 2022 increase was the result of Medicare’s estimated cost of a new Alzheimer’s drug, Aduhelm.

Medicare isn’t paying nearly as much as it estimated for Aduhelm. The manufacturer significantly reduced its price for the drug, and Medicare agreed to pay for the drug only in limited circumstances.

There were calls for Medicare to retroactively reduce the 2022 premiums because of these changes, but that isn’t going to happen. The Centers for Medicare and Medicaid (CMS) said a mid-year change is impractical.

The CMS, however, did announce in late May that the basic Part B premium is likely to be lower in 2023 than in 2022 because of the changes related to Aduhelm.

CMS didn’t give a specific estimate of the probable Part B premium for 2023. Also, the statement is based on data currently available to CMS. As happened in 2022, things could change in the last half of 2022.

Inflation and Social Security Benefits

One effect of the highest inflation rates in 40 years is that readers send me questions about how Social Security is adjusted for inflation, both before and after benefits begin.

Most of you know that once someone starts to receive Social Security retirement benefits, the benefit amount is adjusted each year for what’s known as a cost-of-living adjustment (COLA).

The Consumer Price Index (CPI) for all urban consumers, also known as CPI-U, is used to make the annual adjustment. The 12-month change in the CPI-U through the end of third quarter of one year is used to adjust Social Security benefits for the next year. The CPI-U through September 30, 2021, was used to increase Social Security benefits effective January 1, 2022. The increase was 5.9%.

Some people who aren’t yet receiving their benefits mistakenly believe they should claim them as soon as possible to start receiving their COLAs. That’s incorrect. Executing that strategy would cost you a lot of money in the long run.

When you turn age 62, Social Security calculates your primary insurance amount (PIA), which also is your full retirement benefit. That’s the amount you’ll receive if you claim benefits at your full retirement age based on current earnings history.

But after age 62, the PIA is adjusted for inflation each year even when you haven’t claimed benefits yet. So, once you turn 62, you’re going to receive the COLA whether you’re claiming benefits or not.

Before age 62, you receive a different type of inflation indexing.

Social Security records your earnings each year and calculates retirement benefits based on your highest 35 years of earnings. But each year the historic earnings are increased for the rise in national average wages. That increase usually is higher than the jump in the CPI.

When calculating estimated future benefits for people, Social Security purposely doesn’t factor in all the expected inflation increases. Some say that’s because it doesn’t want to risk giving benefit estimates that turn out to be too high. Others say Social Security wants to understate estimated benefits so people will save more money for retirement.

The point is that you shouldn’t adjust your Social Security claiming strategy because of inflation or your expectations of inflation. Your benefits will be adjusted for inflation, regardless of when you claim them.

Why Commodity Prices Aren’t Higher

Commodity prices climbed sharply in 2022, but they probably would have been even higher if it weren’t for China. A China effect might push prices higher in the second half of 2022.

China closed large portions of its economy in the first half of 2022 as part of its zero-Covid policy. When Covid-19 infections increase in a city or region, residents are ordered to stay home and businesses are closed.

These lockdowns caused China’s demand for commodities to decline, especially for oil and industrial metals. In addition, China adjusted its policies to reduce growth in its real estate sector, and that reduced demand for commodities used in construction.

It is tough to gauge, but analysts have estimated that China’s demand for particular commodities decreased by up to 5% in the first half of 2022. China’s a major consumer of oil and the industrial commodities. That decline in marginal demand had a significant effect on the market and kept commodity prices from rising even more than they did in the first half of 2022.

China recently announced that it relaxed a major regional lockdown. The result is demand for commodities is likely to increase as economic activity resumes in the coming months. That’s going to keep a floor on commodity prices. 

The Data

It should be no surprise to my readers that last week’s Consumer Price Index (CPI) reading for May hit another 40-year high. It was the 22nd time in the last 24 months that the CPI exceeded economists’ consensus expectations.

The CPI increased 1.0% in May and 8.6% over 12 months. Excluding food and energy, the CPI increased 0.6% in May and 6.0% over 12 months. All those numbers equaled or exceeded their counterparts for April.

The price increases were across the board, but essentials such as food, energy and housing were a major factor in the index’s increase.

Energy prices increased 34.6% over 12 months, and groceries increased 11.9%, their highest 12-month jump since 1979.

The Producer Price Index (PPI) increased 0.8% in May, and it leaped 10.8% over 12 months. 

Excluding food and energy, the PPI increased 0.7% in May and 9.7% over 12 months.

The Consumer Sentiment Index from the University of Michigan declined in the first part of June to 50.2 from 58.4 at the end of May. That’s a record low for the index, which goes back to 1978. Even during the financial crisis, the index was a little better than this. 

Historically, the Consumer Sentiment Index from the University of Michigan declines when inflation increases. Also, low readings in the index typically lead to lower retail sales and accompany recessions.

Retail sales declined by 0.3% in May, and April’s retail sales were revised downward to a 0.7% increase instead of the 0.9% climb originally reported.

Declining vehicle sales were a big reason for the decline. Excluding vehicles, sales increased 0.5% in May. 

But the sales numbers aren’t adjusted for inflation, so rising gas prices contributed to the appearance of higher sales. Excluding vehicles and gas, retail sales increased only 0.1%.

The Housing Market Index from the National Association of Home Builders (NAHB) declined to 67 in June from 69 in May. Home builders remain concerned about rising prices, supply shortages and labor shortages. 

The Empire State Manufacturing Index for June was reported to be negative 1.2. That’s an improvement from the negative 11.6 in May, but still indicates the sector contracted in June.

The Small Business Optimism Index from the National Federation of Independent Business (NFIB) held steady at 93.1 in May, compared to 93.2 in April. But May was the fourth consecutive month the index was below the 48-year average of 98.

The percentage of small business owners expecting better business conditions over the next six months reached the lowest level in the 48-year history of the survey.

New unemployment claims increased by 27,000 to 229,000 in the latest week. That’s the first time since January that new weekly claims exceeded the 2019 average of 218,000.

Continuing claims, which lag one week behind new claims, remained at 1.3 million, the lowest level since December 1969.

The Markets

The S&P 500 fell 10.07% for the week ended with Tuesday’s close. The Dow Jones Industrial Average lost 8.39%. The Russell 2000 declined 11.03%. The All-Country World Index (excluding U.S. stocks) decreased 8.33%. Emerging market equities retreated 5.01%.

Long-term treasuries lost 5.48% for the week. Investment-grade bonds fell 4.94%. Treasury Inflation-Protected Securities (TIPS) declined 3.72%. High-yield bonds retreated 5.94%.

On the currency front, the U.S. dollar rose 3.04%. 

Energy-based commodities fell 3.18%. Broader-based commodities lost 6.48%, while gold declined 2.47%.

Bob’s News & Updates

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