US Federal Reserve warns of tariff-driven inflation in 2025: What this means for seniors and the 2026 Social Security COLA

Last week, during his semi-annual hearings on Capitol Hill, US Federal Reserve Chair Jerome Powell explained the recent decision by the central bank’s Federal Open Market Committee (FOMC) to keep the federal funds rate at its current level between 4.25 and 4.5 percent.

President Trump has railed against the decision and Powell personally, launching attacks on his competence. In the past, he has threatened to take the unprecedented step of cutting his tenure short in favor of someone more aligned with his views on monetary policy.

As he did in mid-June when announcing that there would be no change to the base rate set by the Fed, Chair Powell reiterated during questioning from Congressional leaders that the FOMC believes the widespread tariffs imposed by the White House on critical industries could lead to inflation, even if those increases prove short-lived. Higher interest rates slow the flow of money through the economy by making borrowing more expensive. During a period of high inflation, interest rates are increased to reduce borrowing and slow demand. If supply remains constant and demand decreases, prices should decrease.

Powell told the House Committee on Financial Services that before the White House’s tariff plan was announced, the Fed had been poised to continue cutting rates, as it began doing in 2024.

Although little inflation has been observed since April, when the tariffs took effect, the Fed’s forecasts project higher prices. Forecasts released after the June meeting indicate that the FOMC anticipates the annualized inflation rate, based on the Personal Consumption Expenditures Price Index (PCE), to be around 3 percent in 2025, up from 2.7 percent reported in March.

Current 2026 COLA forecasts

In June, the Senior Citizens League (SCL), a senior-rights advocacy group, reported that its forecast for the 2026 Social Security Cost-of-Living Adjustment (COLA) remains at 2.5 percent—the same increase as in 2025. The SCL’s forecast has increased by 0.2 since March, as the conditions included in the model, ranging from price data to unemployment, have evolved.

However, higher prices resulting from tariffs—which would appear in CPI data for July, August, and September—could lead to a higher COLA for 2026. Each year, the Social Security Administration announces the COLA in October, based on the average CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) for the three months preceding that announcement, compared to the same period the previous year. If the impact of tariffs materializes in consumer markets in the coming months, COLA forecasts may need to be revised upward.

What would it take for the 2026 COLA to exceed that offered in 2025?

If the 2026 COLA were based on CPI-W data from March, April, and May, the increase would be around 1.7 percent. To exceed the 2.5 percent adjustment offered in 2025, prices would need to rise by an average of 0.7 percent or more over the next three months.

If prices begin to rise after the COLA is calculated, seniors could feel the pinch, as those increases wouldn’t be reflected in benefits until 2027. If inflation remains elevated through 2026, it would be captured in the 2027 COLA. But if inflation proves to be a short-term phenomenon driven by tariffs and prices fall by summer 2026, seniors may not see any short-term relief reflected in their annual adjustment.

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