1. How is the inflation adjustment calculated?
Each year, the tax rates are adjusted based on the chained consumer price index instead of the basic consumer price index (CPI) that was typically used.
For a minor lower inflation rate than traditional CPI, chained CPI takes into account the substitution effects brought on by increased prices, leading to somewhat lower inflation rate estimates. The basic CPI was replaced by the chained CPI for indexing tax provisions as part of the Tax Cuts and Jobs Act of 2017.
In order to determine the annual index gain, the Internal Revenue Service (IRS) is required to take into account the average increase from one year to the next. They do all these based on the change in the chained CPI from August of the preceding year to July of the current year.
A 6.95% inflation adjustment was calculated using that approach, which is lower than the 8.2% yearly increase in CPI as of September 2022 or the 8% increase in chained CPI for the same time period.
Thank heaven for SS!