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Making Sense of Inflation for COLA Raises

Inflation is on everyone’s mind. Behind the headlines, what is the data saying and how might that apply to COLA raises at your church in 2022?
Making Sense of Inflation for COLA Raises
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Someone on your leadership team will quote a figure of 8.7 percent from recent headlines during budget season. Is that COLA number too high?

This article is designed to help you cut through the headlines and make an informed decision based on all the facts. If you already understand inflation indexes, skip ahead to our summary of data on COLA, inflation, and wage increases at the bottom.

To supplement this article, consider these additional resources:

[updated: December 2, 2022]

Quantifying inflation

The goal of all inflation indexes is to track the changing cost of goods and services over time. To accomplish this, two federal agencies have developed different methodologies. The Bureau of Labor Statistics (BLS) produces the Consumer Price Index (CPI), and the Bureau of Economic Analysis (BEA) creates the Personal Consumption Expenditures price index (PCE). Each index comes in a “core” and “headline” flavor.

There are two major challenges that the government faces when it comes to tracking inflation:

  1. Volatility: Prices increase but they also decrease based on market forces. The price of gas, electricity, and airline tickets over the last 2 years are perfect examples of this volatility.
  2. Behavior: Consumers spending money differently when prices go up. People drive less, buy chicken instead of beef, defer purchases, and cut back on discretionary spending.

The key question that everyone is trying to answer is, “How much less is a dollar worth now than it was a year or a month ago?”

Two indexes in two flavors

The chart below condenses some of the differences between the two major indexes and their respective flavors.If you want to explore the difference between the CPI and PCE further, we recommend reading this excellent 2014 article by the Federal Reserve Bank of Cleveland.

ChurchSalary has condensed two decades of inflation data into the single chart below. Even though inflation is still unreasonably high, some of the indexes and market indicators are hinting that inflation peaked in the summer of 2022 and is either leveling off or trending downward.


The Consumer Price Index for Urban Workers—often simply called CPI in the news—measures the buying habits of people who live in urban or metropolitan areas in the United States.

This is the figure you see in every news story. It tracks average percentage change in prices for over 200 items for roughly 90 percent of the population.

Because CPI is unable to model consumer behavior and tends to magnify price volatility, the Federal Reserve does not use CPI to gauge the underlying trend of inflation. Despite this flaw, CPI persists because it is tied to certain financial transactions and is used by government agencies to adjust income and poverty levels based on inflation.

Core CPI

To minimize volatility, the BLS strips away certain goods and services (e.g., certain energy and food prices) to get a better sense of core inflation. Whenever news stories mention the “core inflation rate,” they are referring either to Core CPI or Core PCE.


The government developed Chained CPI to address the inability of regular CPI to model consumer behavior. This chained-dollar index assumes that some consumers will purchase lower cost options using price data from a previous period.

The flaws of regular CPI have led to a movement within the federal government to use Chained CPI for many income and poverty measures. For example, the 2017 Tax Cuts and Jobs Acts (TCJA) bill attached federal tax bracket increases to Chained CPI.


The Personal Consumer Expenditures Price Index is designed by the Bureau of Economic Analysis (BEA) to track both “a wide range of consumer expenses” as well as “changes in consumer behavior.” It measures the out-of-pocket expenses for consumers, even costs borne by employers such as health insurance, by tracking what businesses are selling.

Core PCE

To minimize volatility, the BEA strips away certain prices to create a measure of core inflation called Core PCE. Because this index is better able to reliably predict long-term, permanent changes in inflation over time, the Federal Reserve uses Core PCE to make policy decisions about inflation that impact the US economy such as raising interest rates or enacting Quantitative Tightening.

If you really want to dig deep on inflation, you could also research the Dallas Fed trimmed-mean PCE inflation rate.

The difference between CPI and PCE

Both indexes weigh the cost of goods and services like items in a shopping cart. The biggest difference between each cart is how they source prices. As the Federal Reserve Bank of Cleveland notes, “The CPI is based on ... what households are buying; the PCE is based on ... what businesses are selling.”

By basing its calculation on business sales, the PCE is better able to model how consumers are altering their buying habits in the face of higher prices—e.g., less red meat and fewer airline tickets. By comparison, regular CPI models the worst-case scenario for consumers—i.e., as if they make no changes to their behavior.

Turning indexes into a COLA

Each of the five indexes is telling a different story about inflation. It is tempting to listen only to the most exciting or comforting stories, but the truth is probably somewhere in the middle. The chart below summarizes all five indexes alongside ChurchSalary’s data on raises from late 2021/early 2022.

Below are the key data points on inflation and COLA raises that churches should bear in mind as they wrestle with changes to their 2023 payroll budget.

  1. Survey data from Primerica indicates that consumers are changing their behavior to adapt to higher prices and the fear of a recession. 71 percent are eating out less and 54 percent are driving less (even as gas prices have been decreasing for over a month). These behavioral changes may help moderate the impact of price increases for some families, but no amount of adaptation cannot fully offset this historically high inflation.
  2. Despite two consecutive quarters of negative GDP growth The third estimate of GDP growth for Q1 and Q2 2022 are -1.6% and -0.6% respectively, there is not a consensus among economists that the US was (or is) currently in a recession. For background, this often repeated definition of a recession is based on a 1974 New York Times article. The semi-official definition is much more nebulous and requires a “significant decline” in employment and real income.According to the National Bureau of Economic Research, a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”The recently published third revision for GDP increased Q2 upward to -0.6 percent and the “preliminary” estimate for Q3 growth has been revised upward from 2.6 to 2.9 percent. The current odds of a recession in the next 12 months are 50 percent, according to economists.
  3. Forecasts for 2023 are starting to improve. The threat of continued interest rate hikes by the Fed with a sharp drop in shipping costs will hopefully conspire to bring inflation back to relatively “normal” levels in 2023. Forecasts estimate the CPI will decrease to 3.1 percent and the PCE to 2.7 percent by the end of 2023. The developing consensus among economists is that “real GDP growth will return to positive territory and the inflation rate will continue to decelerate.”
  4. The government will continue to make conflicting decisions based on three of the indexes. The Social Security Administration will raise benefit payments by 8.7 percent in 2023 based on CPI-U, the IRS will raise tax brackets by about 7 percent in 2023 based on Chained CPI, and the Fed will continue to adjust interest rates based on Core PCE.
  5. Hourly wages for non-supervisory and production workersProduction and related employees include working supervisors and all nonsupervisory employees (including group leaders and trainees) engaged in fabricating, processing, assembling, inspecting, receiving, storing, handling, packing, warehousing, shipping, trucking, hauling, maintenance, repair, janitorial, guard services, product development, auxiliary production for plant's own use (for example, power plant), recordkeeping, and other services closely associated with the above production operations. Non-supervisory employees include those individuals in private, service-providing industries who are not above the working-supervisor level. This group includes individuals such as office and clerical workers, repairers, salespersons, operators, drivers, physicians, lawyers, accountants, nurses, social workers, research aides, teachers, drafters, photographers, beauticians, musicians, restaurant workers, custodial workers, attendants, line installers and repairers, laborers, janitors, guards, and other employees at similar occupational levels whose services are closely associated with those of the employees listed. increased by around 14 percent between February 2020 and August 2022. By comparison, supervisors, managers, and some professionals have seen their wages increase by a smaller amount.
  6. Average wage growth is falling behind inflation across the board. Back in 2021, it was obvious that payroll budgets would not be able keep up with the pace of inflation in 2022. The latest data confirms this reality. In July 2022, the Economic Research Institute (ERI) reported annual wage growth of 2.27 percent in 2020, 3.21 percent in 2021, and they anticipate growth of 3.4 percent in 2022. By comparison, the Federal Reserve reported annual wage growth of between 4.5 and 5 percent in May 2022. ChurchSalary’s survey data on raises indicates that the most common raise in 2021 was a 5 percent raise (for those who received a raise) and the overall average change for pastors was 2 percent. According to ERI, annual payroll growth for organizations they survey is around 14 percent, but this reflects both staff expansion and a return to full employment as well as cost-of-living raises. If you want to dig more into the data, check out the Wage Growth Tracker produced by the Atlanta Federal Reserve to explore salary increases for different types of workers.

The gap between the five inflation indexes indicates that the cost of goods and services increased by between 5 and 8 percent between September 2021 and September 2022. That is a wide range. If you exclude the more volatile “headline” indexes, annual core inflation (as of September 2022) is currently somewhere between 5 and 6 percent.

In light of inflation, the key questions that church leaders need to answer this budget season are:

  1. What can/should we offer in the short-term (bonuses, gas cards, flexible WFH schedules, etc.) to offset the most volatile price increases?
  2. What permanent structural raises makes sense for 2023? And how should this vary for each employee and/or for each pay grade?

At the end of the day, remember that most businesses have been unable to increase their payroll at the same rate as inflation in 2022. Your church is not alone. Focus on employee retention because giving raises to retain staff will likely be cheaper than replacing them.

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ChurchSalary is made possible through funding from the Lilly Endowment Inc. As part of Lilly's "National Initiative to Address Economic Challenges Facing Pastoral Leaders," ChurchSalary—and our parent, Church Law & Tax—is committed to helping church leaders and pastors develop an atmosphere of healthy financial stewardship, especially in the area of church staff compensation.