Author Mary Beth Franklin recently published an excellent primer on the methodology used for calculating the annual percentage increase in Social Security benefits.
In summary, average inflation for the third quarter of the current year – as measured by the Consumer Price Index for Urban Wage Earners (CPI-W) – is compared to the average third quarter CPI-W of the previous year. The CPI-W index is compiled by the Labor Department’s Bureau of Labor Statistics.
The resulting percentage increase, if any, represents the percentage that will be used to increase Social Security benefits for the following year. If there is no measurable inflation, there is no COLA.
You can read the entire November 7, 2014 article here.