Will the Next Social Security COLA Be Higher Than This Year's Increase? The Fed Just Gave a Big Clue.

Source The Motley Fool

Most retirees have probably gotten used to their Social Security benefits increase for 2025 by now. The latest cost-of-living adjustment (COLA) of 2.5% began hitting benefit checks in January.

This adjustment was lower than the amounts Social Security beneficiaries have received in the last three years. But will the next Social Security COLA be higher than this year's increase? The Federal Reserve just gave a big clue.

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The next Social Security COLA as things stand now

You won't be able to count on a higher Social Security COLA next year as things stand now, according to The Senior Citizens League (TSCL). The nonprofit seniors' advocacy organization closely watches inflation data released by the U.S. Bureau of Labor Statistics (BLS) each month to estimate what the next COLA will be. Based on the latest BLS data, TSCL projects that Social Security beneficiaries will receive a 2.2% increase for 2026.

Interestingly, though, the inflation numbers seem to predict a higher COLA. The Social Security Administration (SSA) uses an inflation metric called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). To be specific, the agency uses the average CPI-W for the third quarter of the current year compared against the average for the third quarter of the previous year. The difference (if positive) is the amount used to set the next COLA.

If the average CPI-W for the last three months were used to calculate the next COLA, the increase would be 2.8%. That's above this year's COLA of 2.5% and much higher than the 2.2% projected by TSCL.

Why is TSCL's COLA estimate so much lower? The organization doesn't only use the CPI-W. Its model also includes other factors including the interest rate and unemployment rate.

Why the Fed's comments could mean a higher increase

Although TSCL uses multiple pieces of data to project what the next COLA might be, the actual increase is ultimately determined by inflation in the third quarter. And the chances that inflation will rise at a faster pace later this year now appear to be greater.

That's the logical conclusion after the Federal Open Market Committee (FOMC) met last week. This committee consists of all seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York, and four presidents of the other 11 Federal Reserve Banks who rotate on and off the committee each year.

The FOMC increases its core inflation projection for this year to 2.8% from 2.5%. In its official statement from the March meeting, the committee said, "Uncertainty around the economic outlook has increased." While this statement didn't explain why this is the case, Fed Chairman Jerome Powell's public comments indicated that the Trump administration's tariffs were behind the elevated economic uncertainty.

Granted, the Fed's core inflation is not the same thing as the CPI-W used by SSA in calculating the annual COLA. However, if core inflation rises faster than expected, the CPI-W will almost certainly rise more rapidly too. And if the CPI-W is higher than expected in the third quarter of this year, the 2026 Social Security COLA will likely be higher than this year's increase.

A lot can happen between now and October

Of course, estimates and projections can fluctuate quite a bit in the months leading up to October when SSA announces the annual COLA. That's because a lot can happen between now and then.

Perhaps the White House will ease off its planned tariffs, leading to lower inflation and therefore a lower COLA. On the other hand, a geopolitical crisis that affects oil and gas supplies could cause inflation to spike and result in a higher COLA than anyone is predicting right now.

The bottom line is that predicting what the next Social Security COLA will be is somewhat similar to picking which college basketball teams will make it to the final four. What seems to be the most likely outcome today could soon be much different depending on how the ball bounces.

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Disclaimer: For information purposes only. Past performance is not indicative of future results.
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