History-making moments were aplenty for America’s leading retirement program, Social Security, in 2025. The average monthly retired-worker benefit surpassed $2,000 for the first time, while Social Security’s cost-of-living adjustment (COLA) tipped the scales at 2.8% — the first time in nearly three decades that Social Security payouts have increased by at least 2.5% for five consecutive years.

Another history-filled year looks to be on tap, but for an entirely different reason. Following the latest inflation update from the Federal Reserve, a big change in Social Security’s COLA may await recipients come 2027.

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Jerome Powell speaking with Donald Trump in front of the Federal Reserve's headquarters in Washington, D.C.

President Donald Trump’s Iran war is noticeably lifting the U.S. inflation rate. Image source: Official White House Photo by Daniel Torok. The central bank’s newest inflation forecast is worrisome

Between the 10th and 15th of every month, the U.S. Bureau of Labor Statistics (BLS) releases the prior month’s inflation data, allowing anyone to peruse how prices are changing, compared to the previous year. Although the Fed has been targeting a 2% long-term inflation rate since 2012, trailing 12-month inflation (TTM) has spent the last five years above this mark.

What makes inflation data so noteworthy at the moment is that we’re beginning to see the effects of the Iran war showing up in economic data.

At the end of February, Trump gave the green light for U.S. military forces to commence attacks against Iran. Subsequent to these actions, Iran closed the Strait of Hormuz to most commercial shipping vessels, thereby tying up 20 million barrels of petroleum liquids per day (representing 20% of global crude oil demand).

The largest energy supply disruption in modern history has sent crude oil prices soaring and begun pinching consumers at the fuel pump. We’ve witnessed gas prices rise at their fastest pace in more than 30 years.

Additionally, the inflationary effects of energy supply shocks often lag for businesses by a few months. Once economic data begins to reflect higher transportation and production costs for businesses, the U.S. inflation rate can jump further.

On Monday, May 11, the Federal Reserve Bank of Cleveland’s Inflation Nowcasting tool provided its newest inflation forecast for May. Taking into account newly released economic data, the Cleveland Fed’s forecasting tool projects that TTM inflation will climb to 3.89% in May.

To put this into perspective, U.S. TTM inflation was just 2.4% in February. The effects of President Trump’s Iran war are expected to increase TTM inflation by almost 150 basis points over three months. This is a worrisome pace of acceleration, with potentially significant implications for Social Security payouts in 2027.

A couple seated on a couch who are examining bills and financial statements on a table in front of them.

Image source: Getty Images. Social Security’s 2027 COLA may be historically high (but don’t celebrate just yet)

Social Security’s cost-of-living adjustment is effectively a “raise” passed along each year that accounts for the inflationary pressures beneficiaries face. If the cost of goods and services regularly bought by seniors continued to rise and Social Security benefits remained static, buying power would steadily decline over time. Social Security’s COLA attempts to perfectly offset this potential loss of purchasing power.

Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has served as Social Security’s inflation-measuring yardstick.

Even though the CPI-W is reported monthly by the BLS, only TTM readings ending in July, August, and September (i.e., the third quarter) are used to calculate Social Security’s COLA. Thus, if these inflationary pressures from the Iran war persist into the third quarter, beneficiaries can expect a larger raise in 2027.

Following the release of the March inflation report, independent Social Security and Medicare policy analyst Mary Johnson nearly doubled her 2027 COLA forecast to 3.2% from 1.7%. While the Consumer Price Index for All Urban Consumers (CPI-U) (the number typically used for inflation-reporting purposes) differs slightly from the CPI-W, the CPI-W’s year-over-year increase in May is likely to be similar to the Cleveland Fed’s 3.89% inflation forecast.

Hypothetically, if this inflation trajectory were to persist and Social Security’s 2027 COLA came in at/around 3.9%, it would mark the fifth-highest year-over-year percentage increase in 35 years!

But don’t mistake a historically high cost-of-living adjustment for Social Security beneficiaries being better off. Throughout much of the 21st century, retired-worker beneficiaries have received the short end of the stick — and that’s unlikely to change in 2027.

According to a July 2024-published analysis by nonpartisan senior advocacy group The Senior Citizens League, the purchasing power of Social Security income has declined by 20% for retirees since 2010. This decline in buying power reflects the inherent flaws of the CPI-W.

For example, 87% of Social Security beneficiaries were 62 or older as of December 2024, per Social Security’s 2025 Fast Facts and Figures report. Despite aged beneficiaries making up seven out of eight recipients, the CPI-W is tracking pricing pressures for “urban wage earners and clerical workers.” These are individuals who are typically under age 62 and not receiving a Social Security retired-worker benefit. Put another way, the costs that matter most to seniors aren’t being accurately reflected in the inflationary index that determines the annual COLA.

Additionally, Medicare’s monthly Part B premium has been consistently offsetting Social Security COLAs. Part B is the segment of traditional Medicare that’s responsible for outpatient services.

This year, the standard Part B premium jumped 9.7%, or $17.90 per month, to $202.90. Annual increases ranging from 6% to 16% have been common for most of the century, and they can mostly or fully offset Social Security’s COLA for lifetime low-income beneficiaries.

Although the Social Security’s 2027 COLA could be a history-maker, it’s not going to reverse a quarter-century of structural issues with the CPI-W or offset a breathtaking climb in the Medicare Part B premium.

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Yikes! The Federal Reserve’s May Inflation Forecast Is In, and It Has Big Implications for Social Security’s 2027 COLA. was originally published by The Motley Fool